Whose Inflation? A Characterization of the CPI Plutocratic Bias

May 1, 2001

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

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

Pages:
17
Volume:
2001
DOI:
https://doi.org/10.5089/9781451847949.001
Issue:
059
Series:
Working Paper No. 2001/059
Stock No:
WPIEA0592001
ISBN:
9781451847949
ISSN:
1018-5941

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