Robust Regularities in the Heterogeneity of Consumer Price Inflation

Abstract: We define the Individual Excess Inflation Rates (IEIR) for consumer goods and services as their Individual Inflation Rates (IIR) minus the CPI inflation rate. Cross-sectional heterogeneity in the IEIRs of consumer items can be explained by their varying exposures to both pro-cyclical factors (e.g., long-term inflation expectations, wages, and consumer sentiment) and counter-cyclical factors (e.g., the unemployment gap, economic policy uncertainty, and financial conditions). Approximately 40% of the variation in IEIRs is attributable to the differential responses of items to these macroeconomic factors. Items that are more sensitive to pro-cyclical factors tend to display lower IEIRs, whereas those more responsive to counter-cyclical factors exhibit higher IEIRs. These findings remain robust after controlling for other potential drivers, such as inflation volatility and persistence.