Whose Inflation? A Characterization of the CPI Plutocratic Bias

IMF Working Papers, May 1, 2001

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Prais (1958) showed that the CPI computed by statistical agencies can be interpreted as a weighed average of household price indexes, the weight of each household determined by its total expenditures. We decompose the difference between the standard CPI and a democratically weighed index (i.e., the plutocratic bias) as the product of average income, income inequality, and the covariance between individual price indexes and a parameter related to each good's income elasticity. This decomposition allows us to interpret variations in the size and sign of the plutocratic bias, and also to discuss issues pertaining to group indexes.

Decomposition of the difference between the standard CPI and a democratically weighed index (the plutocratic bias).
Components of the decomposition:
- average income
- income inequality
- covariance between individual price indexes and a parameter related to each good's income elasticity
Interpretation of variations in the size and sign of the plutocratic bias.
Discussion of issues pertaining to group indexes.

Subject: Consumer price indexes, Household consumption, Income, Income inequality, Inflation, National accounts, Personal income, Prices
Keywords: aggregation, bias decomposition, budget share, consumer price index, Consumer price indexes, covariance term, CPI user, democratic index, equivalence scales, expenditure pattern, group index, Household consumption, income elasticity, Income inequality, inflation, Personal income, plutocratic bias, plutocratic index, U.K. CPI, WP

Whose Inflation? A Characterization of the CPI Plutocratic Bias - WP/01/59
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