Measuring cost of living inequality during an inflation surge

We study the welfare cost of inflation during the 2021–2023 UK inflation surge using household scanner data on fast-moving consumer goods. We develop and implement a non-homothetic, index number-based decomposition of inflation-driven welfare changes into exposure, substitution, and income effects. We document pronounced “cheapflation”: within narrowly defined categories, prices rose fastest for lower-quality necessities disproportionately consumed by poorer households. This generates sharply regressive inflation exposure that is only slightly mitigated by behavioural responses. As purchasing power fell, cheapflation interacted with non-homothetic demand movements down the quality ladder (captured by our income-effects term) to amplify welfare losses and reshape the distribution of exposure to future necessity-driven inflation.

The authors would like to gratefully acknowledge financial support from the ESRC under grant number CPP: ES/T014334/1. Chen also gratefully acknowledges financial support from the UBEL DTP Research Training Support Grant.
 

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