Academic journal article International Journal of Business

Inflation Rate Variations across Household: Empirical Evidence from Taiwan

Academic journal article International Journal of Business

Inflation Rate Variations across Household: Empirical Evidence from Taiwan

Article excerpt

ABSTRACT

The variability in the rates of inflation across household groups is an important public policy issue. In this empirical study using Taiwan's household expenditure data for the period 1991-1996, we found statistically significant evidence to support the claim that different household groups face differential price changes, and that these variations are persistent over time. We also found an inverse relationship between the inflation rates faced by each household group and the household income level; in particular, the poorest group faced an inflation rate that was significantly higher than the general population by 0.15 percentage point annually. In light of the results of this study, and taking into consideration the intrinsic value of the group-specific price indexes, we recommend the current welfare programs be linked to these indexes.

JEL: D12, J10

Keywords: Consumer price index; Cost-of-living index; Inflation; Group-specific price index

I. INTRODUCTION

The possibility of variability of the inflation rates faced by different household units and household groups has long been an important public policy issue in the literature. It is essential to clarify such an issue, for it has important normative implications for public policies. In order to take into consideration the impact of price changes on the cost of living, numerous public policies in the United States (especially those related to social welfare spending) have included the escalator clauses, which would automatically call for cost-of-living adjustments, normally using the aggregated Consumer Price Index (CPI) as the basis for adjustment. (1)

Different public policies would, however, affect different household groups. Both conceptually and theoretically, different household groups will face different rates of inflation because of the differentials in their expenditure patterns. (2) On the one hand, the CPI as a fixed-weight Laspeyres index has a number of inherent shortcomings that reduce its usefulness as a cost-of-living index (Boskin, Dulberger, Gordon, Griliches, and Jorgenson, 1998; Deaton, 1998). On the other, the CPI cannot correctly reflect the movements in the cost of living faced by different household groups, either overstating or understating their inflation experience relative to the other groups (Idson and Miller, 1997; Idson and Miller, 1998).

Failure to adjust correctly the changes in the cost of living across household would not only distort the distribution of income and consequently aggravate economic inequality, but also have serious fiscal implications for government budget. (3) This is why the merit of such cost-of-living-indexing method based only on the CPI has been questioned and criticized. This is also why researchers have increasingly stepped up the urge for the government to construct group-specific price indexes as a remedy.

As an on-going effort, a number of studies have been devoted in recent years to addressing this index number problem empirically. Generally, these studies have indeed found that there were variations in the rates of inflation faced by different household types in the United States. For example, Michael (1998) and Hagemann (1982) both find statistically significant, but not persistent, differences in measured price indexes across different household groups. For studies that are more restricted in scope, the empirical results are somewhat mixed, but still support the general preposition that there are variations in the inflation experience across household groups. Amble and Stewart (1994) focus on an experimental price index for the elderly in the period 1987-1993, and finds the elderly face relatively higher inflation rates, which are in large part due to relatively faster price increases in medical care that in turn represents a relatively larger share of the elderly household group's expenditure over the period studied. Moulton and Stewart (1999) give an overview of the experimental price indexes and come to the same conclusion with regards to the inflation rates faced by the elderly group. …

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