# _III. 2 Empirical evidence on inflation inequality_

What are the empirical patterns of inflation across households in different percentiles of the expenditure distribution? The first issue to consider is whose inflation rate is best captured by standard CPI inflation. For the U.K., Muellbauer (1974) estimates that CPI inflation is close to the inflation rate faced by a household in the 71 percentile, whereas for the U.S. Deaton (1998) estimates that it approaches the inflation of the 75 percentile.

Given the higher income and consumption inequality of the Latin American countries under analysis here, one would expect the CPI to represent an even higher percentile of the distribution. Figure 1 plots the effective annual inflation of the different percentiles and the average CPI–based inflation for the last available spell for each country.<sup>6</sup> The figure reveals three interesting facts. First, the line describing the percentile-specific inflation rates crosses the horizontal line that describes CPI inflation between the 80 and 90 percentile (more specifically, between the 80 and 85 percentile in Brazil, Mexico and Peru and between the 85 and 90 percentile in Colombia). This indicates that in all countries under analysis CPI-based inflation is most representative of the inflation rate experienced by a household in the highest quintile.

Second, the percentile-specific inflation rates in Figure 1 display in all cases a rising pattern, implying that in the episodes shown richer households experienced higher inflation than poorer ones – in other words, inflation was anti-rich. More formally, Table 7 reports the results of regressing the percentile-specific inflation rate on the percentile and a constant term, for the nine episodes under consideration. It indicates that, except in the case of Mexico (1994 – 1996), the inflation rate always rises significantly with the percentile – i.e., higher percentiles have significantly higher inflation rates.

Third, the difference between the inflation rates of the richest and the poorest is of a significant magnitude. For example, in Brazil (1988-1996) the difference between the inflation of the highest and lowest quintiles was close to 7 percentage points per year. In Colombia (19972003), Mexico (1996-2002) and Peru (2001-2003), the inflation differential was smaller but still noticeable, at .5-.7 percentage points per year. Similarly, the difference between average CPI inflation and the inflation of the lowest percentiles is not negligible either for the same periods – some .3 percentage points per year in Peru, .4 in Mexico and Colombia, and 4 percentage points in Brazil.

For all the spells under consideration, Table 8 summarizes the inflation rates by quintile, and their respective deviation from standard CPI inflation. For the most part, the table conveys the same message as Figure 1 above. In the episodes considered, inflation has consistently been anti-rich, with poorer households experiencing lower inflation rates than richer ones. The only exception was Mexico in 1994-1996.

For comparison, Table 8 also reports the growth rate of real household consumption by quintile, computed using each percentile’s consumption price index. This provides a rough

> 6 Due to unavailability of expenditure surveys for the exact years on which official CPIs are based, we use the expenditures from the survey closest to the CPI base year in each country in order to mimic the base-period households’ baskets. In particular, we use as base periods 1996, 1997, 2002 and 1995 for Brazil, Colombia, Mexico and Peru respectively (the official base periods are Dec 1993, Dec 1998, Jun-Dec 2002 and 1994 respectively).

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