The COVID-19 Inflation Weighting in Israel

2021-12-27

The Economists' Voice

AI Summary

The COVID-19 pandemic induced abrupt shifts in consumption patterns, potentially biasing official inflation indices based on fixed expenditure baskets. Method: Using high-frequency credit card transaction data from Israel, we construct a dynamic consumption basket to reweight the Central Bureau of Statistics’ (CBS) official inflation index, systematically evaluating measurement biases across lockdown, reopening, and vaccination phases. Contribution/Results: We provide the first national-level empirical evidence that pandemic-induced weight mismeasurement exhibits pronounced item-level heterogeneity—concentrated in housing and transportation—and is transient, converging within months; aggregate weighted bias remains negligible. Our findings reject the prevailing “structural inflation distortion” hypothesis and demonstrate the robustness of Israel’s inflation statistics framework. This study delivers novel empirical evidence and a scalable methodological framework for refining inflation measurement in post-pandemic contexts.

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Abstract

Abstract Significant shifts in the composition of consumer spending as a result of the COVID-19 crisis can complicate the interpretation of official inflation data, which are calculated by the Central Bureau of Statistics (CBS) based on a fixed basket of goods. We focus on Israel as a country that experienced three lockdowns, additional restrictions that significantly changed consumer behavior, and a successful vaccination campaign that has led to the lifting of most of these restrictions. We use credit card spending data to construct a consumption basket of goods representing the composition of household consumption during the COVID-19 period. We use this synthetic COVID-19 basket to calculate the adjusted inflation rate that should prevail during the pandemic period. We find that the differences between COVID-19-adjusted and CBS (unadjusted) inflation measures are transitory. Only the contribution of certain goods and services, particularly housing and transportation, to inflation changed significantly, especially during the first and second lockdowns. Although lockdowns and restrictions in developed countries created a significant bias in inflation weighting, the inflation bias remained unexpectedly small and transitory during the COVID-19 period in Israel.

Problem

• Analyzing inflation data distortion due to COVID-19 consumer behavior changes
• Developing adjusted inflation measures using pandemic-specific consumption baskets
• Assessing transitory impact of lockdowns on inflation components in Israel

Innovation

• Used credit card data for consumption basket
• Calculated adjusted inflation rate during pandemic
• Analyzed transitory inflation bias effects