Price Index Numbers under Large-Scale Demand Shocks–The Japanese Experience of the COVID-19 Pandemic

We investigate the prices and quantities of face masks when the 2020 COVID-19 pandemic was particularly serious to understand the impact of demand shocks on the cost of living index (COLI). Using a recently developed index number formula that is exact for the constant elasticity of substitution utility function with variable preferences, we quantified the degree of demand shock caused by the pandemic. Our empirical analysis revealed that shifts in preferences during the pandemic were so large that the COLI with variable tastes became very different from the standard superlative indexes. While the prices of face masks decreased in the Fisher index in May 2020 by 0.76% per week, the COLI increased by 1.92% per week.