This study examines households’ habit formation in consumption and investigates how household
budget allocations are related to welfare changes. The results of the dynamic almost ideal demand
system show that there exist habit persistence in purchasing food, clothing, housing, and health
items and depletion in other items. Regarding the price responsiveness, the results reveal that
price changes result in household budget reallocations with varying income and substitution
effects. Moreover, the compensating variations are used to measure welfare changes between
2003 and 2016. The results represent that the increased prices result in welfare losses despite
households’ budget reallocations across all income quintiles.