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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes
used to combine the indexes into an overall CPI would give equal importance to the spending patterns of each individual—despite the fact that upper-income households contribute a substantially larger fraction to overall consumption than those with lower incomes.
Over the past several decades, a number of studies on inflation rates calculated with expenditure weights for different income groups over varying time periods have found that the differences are slight (Michael, 1979; Hagemann, 1982; Blank and Blinder, 1986; Kokoski, 1987; Garner et al., 1996), although a few earlier studies suggested that larger differences may sometimes arise.15 A more recent study, by BLS economist Mary Kokoski (2000), estimated an index for the years 1987 through 1997 along the lines outlined here and compared the results to the regularly published CPI-U. As is very often the case when comparing aggregate indexes that differ only in upper-level weighting patterns, there was little difference between the average rate of change in the two indexes. Over the 10-year period, the democratic index rose at an annual rate 0.05 percent faster than the plutocratic version. But for various subintervals the differences were larger: the democratic index rose 0.5 and 0.3 percent faster from 1988 to 1990 and from 1995 to 1997, but 0.2 percent slower from 1990 to 1995.
The Kokoski article also estimates indexes for each quintile of the income distribution.16 Differences in the performance of the democratic and plutocratic indexes during the various sub-intervals reported above were associated with large differences in the rate of inflation faced by households in the top and the bottom quintiles. From 1988 to 1990 and 1995 to 1997, the index for the bottom quintile rose 1.6 and 0.7 percent a year faster than the index for the top quintile, while in the 1990-95 period the experience was reversed, with the index for the bottom quintile rising 0.9 percent a year slower. As would be expected, deviations from the change in the overall democratic index during these intervals were almost always a good bit smaller among the middle three quintiles than in the top and bottom ones.
While they lasted, the differences in the change between the upper- and lower-quintile indexes were quite large, especially since the indexes captured only the difference in budget shares and not any differences in prices paid. The fact that the differences reversal themselves several times within the period does
Deaton and Muellbauer (1980) found a 2 percent greater-than-average inflation for the poor in Britain over the high inflation period of 1975-1976. Kuznets (1966) found that over the long term, as income grows, food prices, which loom large in the budgets of the poor, rise faster than prices of manufactured goods. But some members of the panel believe that the modern speed of innovation in product design, and the likelihood that the rich can take greater advantage of product improvements, would tend, in a heavily quality adjusted index, to show an index for the rich that rises less rapidly than one for the poor.
Kokoski estimates a democratic and plutocratic index for each quintile, but as might be expected when households are segregated by income levels, they exhibit only very small differences.