Losing to Inflation : Unmasking the Unequal Price Effect of Inflation across Households

Standard measures of inflation, such as changes in the Consumer Price Index, do not account for the different effects of inflation across income groups emerging from variations in consumption patterns and differences in price trends across consumption categories. This could understate the adverse welfare effects of inflation for poor households. For instance, previous episodes of rising food prices suggested that poor households experience higher inflation rates because food constitutes a relatively larger share of their consumption expenditures. In light of recent increases in energy and food prices in Pakistan, this paper estimates decile-wise inflation to explore the heterogeneity of inflation rates across the income distribution. The findings suggest that relatively poorer households experience higher inflation overall. The poorest households, on average, experienced inflation rates that were one percentage point higher than those faced by the wealthiest households. This paper also suggests policy recommendations to mitigate the higher inflation effects on the poor.