annum), mostly due to the rising relative cost of health care.<sup>1</sup> In contrast, they do not find systematic differences between the inflation rates faced by rich and poor households, nor between those of urban and rural households.<sup>2</sup> Inflation inequality has also attracted some attention outside the U.S. For the U.K., Crawford and Smith (2002) find that poor households experienced significantly lower average rates of inflation than rich households over 1976-2000. For the case of Argentina, which experienced large fluctuations in inflation over 1989-1998, Lodola et al. (2000) find that on the whole the poor suffered lower inflation than the rich in high-inflation years, and the opposite happened in low-inflation years. For Taiwan, Lieu, Chang and Chang (2001) conclude that in 1991-96 inflation was persistently higher for low-income and urban households.

In Hong Kong, the Census and Statistics Department actually computes three consumer price indices by income bracket (in addition to the standard CPI).<sup>3</sup> In the year 2000, for example, the inflation rates of the three group-specific indices were, respectively -2.8, -3.8, and -4.5 percent, while the overall CPI fell by 3.7 percent. Thus, the differences in inflation rates across income groups were fairly substantial, given the relatively low levels of overall inflation.<sup>4</sup> Few papers have focused explicitly on the distributional consequences of inflation heterogeneity. Ruiz-Castillo _et al_ (2002) use Spanish data to explore the distributional implications of adjusting household-specific price indices for quality-change bias. In turn, Crawford and Smith (2002) reassess the trends in UK inequality over 1975-2000 using household-specific CPIs, but find that the results are highly sensitive to the choice of base year for the indices.

It is worth noting that these issues are closely related to, but conceptually different from, the question of whether inflation is more harmful for the poor than for the rich. This has been explored by a fairly sizable literature (see e.g., Easterly and Fischer 2001 for discussion and further references), focused on the workings of mechanisms such as indexation of prices, wages or financial assets and liabilities. Our analysis is not concerned with these issues, but with the measurement of real income and inequality under household heterogeneity.

This paper uses household survey data to explore the empirical significance of inflation inequality in nine episodes corresponding to four Latin American countries: Brazil (1988-1996), Colombia (1997-2003); Mexico (1984-1989; 1989-1994; 1994-1996; 1996-2002), and Peru (1995-1999; 1999-2001; 2001-2003). These countries seem well suited for this kind of analysis, given that some of them (e.g., Brazil, Colombia) are among the most unequal in the developing world, while others (e.g., Peru) not only suffer high inequality, but have also shown a deteriorating trend in recent years (see DeFerranti _et al_ 2004 for details).

> 1This issue has gone beyond scholarly debate, and a proposal currently with the House of Representatives (H.R.2035, 2001) would require the Bureau of Labor Statistics to build a special consumer price index for the elderly.

> 2Regarding the rural/urban inflation differential, Hobijn and Lagakos (2003) conclude that its fluctuations are mainly driven by the relative price of gas, due to the fact that rural households devote a much larger expenditure share to gas than do urban households. 3 Specifically, CPI-A is based on the expenditure patterns of the bottom 50 percent of the population, CPI-B refers to the next 30 percent, and CPI-C is built for the next 10 percent. 4 This is noted by Ley (2005).

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