Estimating Upward Bias of Japanese Consumer Price Index Using Engel's Law

Abstract

The Japanese Consumer Price Index (CPI) is considered to be upwardly biased. This paper estimated the Engel curve based on National Survey of Family Income and Expenditure data to measure the bias. The estimated bias for the period 1989 to 2004 was 0.53 percentage points per annum. Correcting the bias led to a lower inflation rate of 0.14 percent per year, against the official inflation rate of 0.65 percent during the period. A demographic analysis showed that a household with a non-working spouse faced a larger bias suggesting that the opportunity cost of shopping determines the size of the bias.