Cost of Living Inequality during the Great Recession

Using detailed barcode level data, we construct income-group specific price indices for the period of 2004 to 2010. We find substantial differences across income groups arising mainly during the Great Recession. The annual cost of living inflation of the highest quartile has been on average 0.7 percentage points lower than that of the lowest quartile of the income distribution. The difference can be explained by the way consumers adjusted their shopping behavior to mitigate the crisis. We find that product quality substitution, a margin mostly available to richer households, is the main mechanism explaining the differences in cost of living inflation. Our evidence suggests that not accounting for these differences during economic downturns could lead to significant biases in the calculation of inequality and poverty measures.