Pro-Rich Inflation in Europe: Implications for the Measurement of Inequality

Abstract

The development of inequality has received increasing attention in recent years. While inequality of disposable income has significantly increased in some countries, it was rather stable in other European countries. One possible weakness of existing studies that try to document the development of inequality is the use of a uniform consumer price inflation rate (CPI). Using such a common CPI implicitly assumes that the consumption baskets of low income households are subject to the same price increase as the consumption baskets of more affluent households. However, if price increases are more prevalent for goods that are disproportionally consumed by poorer households, then the standard approach of studying inequality measures over time will underestimate the change in inequality. Against this background, the present paper studies the distributional consequences of a systematic variation in expenditure shares and prices. Using European Union Household Budget Surveys and Harmonized Index of Consumer Prices data, we construct householdspecific price indices and ask whether inflation in recent years was lower for households belonging to upper deciles. Within a sample of 25 EU countries over the period 2001-15, our calculations reveal the existence of a pro-rich inflation. This means that, compared to consumption baskets consumed by lower deciles, the consumption baskets of the more affluent deciles had a lower inflation rate. This holds for almost all countries. Across countries, the consumption bundles of the poorest deciles have, on average, become 10.5 percentage points more expensive than those of the richest decile. This translates in a yearly inflation difference of 0.72 percentage points and is a considerable difference if compared to the average CPI of 2.67%. We find that ignoring the differential inflation across the distribution underestimates the change in the Gini measure (based on consumption expenditure) by up to 0.03 points. The inflation effect is not uniform across countries. Therefore, the crosscountry heterogeneity of pro-rich inflation is large enough to alter the inequality ranking of numerous countries. The average inflation effect we detect is almost as large as the change in the standard Gini measure over the period of interest. For many countries, the usual inequality measures do not indicate a pronounced change. Our results may help explaining the general concern among Europeans about increasing inequality that nevertheless seems to exist. Our study raises the question of how governments should react with their income redistribution to different inflation rates for differently affluent households.

Inflation Variability Across Australian Households: Implications for Inequality and Indexation Policy*

“…The first paper to examine group price indices is the seminal work of Pollak (1980) applied to a social cost of living index. Similar questions about the differential experience of inflation by household income level to those raised in this paper have been asked by Chiru (2005) for Canada; Hobijn and Lagakos (2005), Broda and Romalis (2009) and Kaplan and Schulhofer‐Wohl (2017) for the United States; Mehrhoff and Breuer (2010) for Germany; and Weichenrieder and Gurer (2018) for 25 European Union countries. Like us, they utilise detailed household income and expenditure data, as well as price data, to produce inflation measures for households disaggregated by income over various time periods.…”

“…More recent studies by Kaplan and Schulhofer‐Wohl (2017) of US households and Weichenrieder and Gurer (2018) of European households both found that lower‐income households experience higher inflation than other households during the period of study.…”

“…The results from these studies vary, making generalised insights difficult. Kaplan and Schulhofer‐Wohl (2017) and Weichenrieder and Gurer (2018) find that lower‐income households experience higher inflation than other households; Mehrhoff and Breuer (2010) found that the general inflation trends across households were almost the same; Chiru (2005) and Hobijn and Lagakos (2005) found that higher‐income households experienced higher rates of inflation in some periods of the study while lower‐income households experienced higher rates of inflation in other periods. Broda and Romalis (2009) found that lower‐income households experienced lower inflation relative to higher‐income households over the period of study in the USA.…”