We use scanner data to estimate inflation rates at the household level. Households' inflation rates are remarkably heterogeneous, with an interquartile range of 6.2 to 9.0 percentage points on an annual basis. Most of the heterogeneity comes not from variation in broadly defined consumption bundles but from variation in prices paid for the same types of goods - a source of variation that previous research has not measured. The entire distribution of household inflation rates shifts in parallel with aggregate inflation. Deviations from aggregate inflation exhibit only slightly negative serial correlation within each household over time, implying that the difference between a household's price level and the aggregate price level is persistent. Together, the large cross-sectional dispersion and low serial correlation of household-level inflation rates mean that almost all of the variability in a household's inflation rate over time comes from variability in household-level prices relative to average prices for the same goods, not from variability in the aggregate inflation rate. We provide a characterization of the stochastic process for household inflation that can be used to calibrate models of household decisions.
Related paper: Working Paper 732, _Inflation at the Household Level: Web Appendix_, https://doi.org/10.21034/wp.732
Published in: _Journal of Monetary Economics_ (vol. 91, November 2017, pp. 19-38), https://doi.org/10.1016/j.jmoneco.2017.08.002.
Updated version: Federal Reserve Bank of Chicago Working Paper 2017-13, https://www.chicagofed.org/publications/working-papers/2017/wp2017-13.