but are not limited to, differences in consumption bundles, limited resources for dealing with rising prices (e.g., substitution across goods), absence of indexed wages broadly due to informal employment, and lower financial inclusion resulting in holding savings and wealth in cash (Kahn 1997; Erosa and Ventura, 2002; Burdick and Fisher, 2007; Cysne et al., 2005; Areosa and Areosa, 2016).

# **2. DATA AND METHODOLOGY**

Estimating household-level inflation rates depends on combining data on consumer prices with household expenditures. The monthly data on the Consumer Price Index (CPI) are collected and compiled by the Pakistan Bureau of Statistics (PBS). The current base year for price statistics is 2015-16. The data on household expenditure have been collected by the PBS through the Household Integrated Economic Survey (HIES). The latest HIES available is that of 2018-19. The HIES data (2018-19) covered 24,809 households in four provinces. The total number of expenditure items covered in the survey is 283. The expenditure items are grouped into 12 main categories according to the Classification of Individual Consumption According to Purpose (COICOP). These items across the 12 commodity groups include Food and Non-Alcoholic Beverages (98); Alcoholic Beverages, Tobacco (8); Clothing and Footwear (13); Housing, Water, Electricity, Gas and other Fuels (24); Furnishing, Household Equipment, and Routine Maintenance (41); Health (6); Transport (14); Communication (5); Recreation & Culture (14); Education (3); Restaurants and Hotels (29); Miscellaneous Goods and Services (28).

The urban CPI collects price data on 356 items, whereas the rural CPI covers 244 for price information. The Laspeyres formula computes urban and rural CPIs using weights from the Household Integrated Income and Consumption Survey (HIICS 2015/16).<sup>2</sup> These regional CPI are then used to compile the national CPI. That is, the weighted geometric mean is computed to obtain the national CPI, using the proportion of urban and rural consumption received through HIICS 2015/16 as their respective weights. It is important to mention that the commodity groups in the CPI are consistent with COICOP categories. The issue, however, is that this CPI assumes the same weight of a COICOP category for all households (See Table A1 in the Appendix). For instance, the national CPI assumes that each household spends 34.58 percent of its budget on food and non-alcoholic beverages. The urban CPI assumes this to be 40.87 percent for all urban households while the rural CPI assume this to be 30.42 percent for all rural households. In reality, however, and we will see in the next section, the weights for these commodity groups (or COICOP categories) vary across income groups.

The fact that commodity groups in the CPI are consistent with COICOP categories allows us to combine the two datasets at the commodity groups level (COICOP categories) to estimate the household-level, and subsequently decile-wise, inflation rates in Pakistan. The household-specific inflation rate for each household, _i_ , is calculated as follows: ii ππ

> 2 The weights for commodity groups obtained from HIICS are different for rural and urban CPIs as shown in Table A1 in the appendix.

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