differentials.

Third, in the majority of spells (six out of nine), the respective contributions of price changes and of real expenditure changes to nominal inequality trends were of opposite signs. Loosely speaking, in these episodes inflation inequality partially offsets real inequality. In some cases (e.g., Brazil 1988-1996) real and nominal inequality indices move in opposite directions. In others, the direction of change in nominal and real inequality is the same but the respective magnitudes are very different – e.g., in Mexico (1984-1989) we find, by any of the indices considered, a modest decline in nominal inequality, but a much bigger one in real inequality.

It is worth noting that these results arise from a decomposition of nominal inequality changes in which the contribution of price changes is calculated on the initial-year consumption basket, as can be seen from equation (4) above. Alternatively, the calculations could make use of the final-year basket, yielding the alternative decomposition As with (4), the first term in the right-hand side of (4’) captures the change in real inequality, while the second reflects the contribution of price changes. Crawford and Smith (2002) report that when inequality decompositions are performed over long time spells and based upon levels of inequality indicators, the results turn out to depend on the base year. However, when looking at changes instead of levels of the inequality indicators, they find that yearly variations are not sensitive to the selection of reference basket.

Hence, in our case we might expect that the choice between (4) and (4’) should not make a big difference. This is explored in the last two columns of Table 11, which report the results obtained using the decomposition in (4’). Comparison with the two preceding columns, based on (4), reveals only slight changes in the results. It also confirms the finding in Table 9 that when final-period baskets are used, the relative contribution of prices is diminished due to the substitution effects, but the trends in real and nominal inequality measures are largely unaffected.

# **IV. Conclusions**

Differences in spending patterns across households, together with differences in the evolution of prices across goods, imply that different households face different inflation rates. This has potentially important implications for the extent to which standard CPI inflation can be viewed as a meaningful summary measure of the price trends faced by consumers, particularly those at the bottom of the income distribution, as well as for its frequent use as benchmark for cost-of-living adjustment of public transfers and administered prices.

Furthermore, the fact that different households face different inflation rates also means that conventional assessments of distributional trends based only on nominal income and/or expenditure may provide a misleading guide to the trends in the distribution of their constantprice counterparts. Such discrepancy between trends in nominal and real inequality arises when inflation differentials across households are systematically related to their income (or expenditure) differentials.

This paper has explored these issues using household survey data from four Latin 11