from the Kansas Fed
— this post authored by Jun Nie, Senior Economist, and Akshat S. Gautam, Research Associate
Economists often use measures of inflation – the percent change in the aggregate price level in a given period – to estimate changes in the cost of living. For example, an annual inflation rate of 2 percent means that the average household will spend 2 percent more to purchase the same basket of goods this year than in the previous year. However, this aggregate measure can mask large differences in the actual cost of living faced by households with different spending patterns. Older households, for example, typically spend more on health-related services, while younger households spend more on education. If prices in the health-care and medical services sector rise at a faster rate than prices in the education sector, older households may, in turn, experience a higher inflation rate than younger households.
Measuring possible differences in the cost of living across age groups requires a comprehensive picture of these groups’ spending across expenditure categories as well as how prices in these categories change over time. We use the Consumer Expenditure Survey, the most comprehensive household-level expenditure data set in the United States, to measure the spending patterns of households at different ages. After exploring these differences across age groups, we then combine the expenditure data with price data from the Bureau of Labor Statistics to examine differences in the cost of living faced by different age groups.
Our results suggest that older households, in general, have faced slightly higher inflation rates than younger households over the past four decades. This is mainly because older households spend relatively more on health-related expenses, which have had a higher inflation rate than expenses such as transportation and leisure, on which younger households spend relatively more. In addition, we find that the inflation gap between older and younger households has narrowed significantly over the last four decades as the inflation rate of health-related expenses has declined. The difference in spending patterns of older and younger households has remained relatively stable over time and contributed little to the declining inflation gap.
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Source
https://www.kansascityfed.org/~/media/files/publicat/ econrev/econrevarchive/ 2019/4q19niegautam.pdf
