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Getting realabout inequality : evidence from Brazil, Colombia, Mexico, and Peru

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Author Info
Goni, Edwin
Lopez, Humberto
Serven, Luis

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Abstract

Consumption baskets vary across households and inflation rates vary across goods. As a result, standard consumer price index (CPI) inflation may provide a misleading measure of the inflation actually faced by poor households, more so the more unequal the distribution of aggregate consumption across households. Likewise, changes in observed nominal consumption inequality may be very different from those in true inequality, that is, that measured using household-specific CPIs. The authors explore empirically these issues using household data covering nine episodes from four Latin American countries (Brazil, Colombia, Mexico, and Peru). They find that in these countries standard CPI inflation typically reflects the inflation rate faced by a rich consumer located in the 80 to 90 percentile of the distribution of consumption expenditure. In most episodes the authors also find that inflation was anti-rich-that is, the inflation faced by the richest consumers was higher than the inflation faced by the poorest consumers. As a result of this bias, the observed increases in nominal inequality generally exceed the actual changes in real inequality. These results are robust to correcting for quality change bias in the CPI, to the use of alternative price indices, and to the use of alternative inequality measures.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3815.

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Date of creation: 01 Jan 2006
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Handle: RePEc:wbk:wbrwps:3815

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Related research
Keywords: Markets and Market Access; Economic Theory&Research; Access to Markets; Inequality; Consumption;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Eduardo Ley, 2005. "Whose inflation? A characterization of the CPI plutocratic gap," Oxford Economic Papers, Oxford University Press, vol. 57(4), pages 634-646, October. [Downloadable!] (restricted)
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  2. Deaton, Angus, 1998. "Getting Prices Right: What Should Be Done?," Journal of Economic Perspectives, American Economic Association, vol. 12(1), pages 37-46, Winter. [Downloadable!] (restricted)
  3. Hagemann, Robert P, 1982. "The Variability of Inflation Rates across Household Types," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(4), pages 494-510, November. [Downloadable!] (restricted)
  4. Easterly, William & Fischer, Stanley, 2001. "Inflation and the Poor," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(2), pages 160-78, May.
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  5. Ruiz-Castillo, Javier & Ley, Eduardo & Izquierdo, Mario, 2002. "Distributional aspects of the quality change bias in the CPI: evidence from Spain," Economics Letters, Elsevier, vol. 76(1), pages 137-144, June. [Downloadable!] (restricted)
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  6. Diewert, W Erwin, 1998. "Index Number Issues in the Consumer Price Index," Journal of Economic Perspectives, American Economic Association, vol. 12(1), pages 47-58, Winter. [Downloadable!] (restricted)
  7. Bart Hobijn & David Lagakos, 2003. "Inflation inequality in the United States," Staff Reports 173, Federal Reserve Bank of New York. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Marcos Chamon & Irineu de Carvalho Filho, 2006. "The Myth of Post-Reform Income Stagnation in Brazil," IMF Working Papers 06/275, International Monetary Fund. [Downloadable!]
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