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Effect of inflation differentials across income groups on inequality measures: the Turkish case

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2020
Özüdoğru, Cem Taylan
The official inflation rate reflects the inflation of a typical urban household in an economy. However, inflation rates across income groups may diverge from each other since different income groups have different consumption patterns. The probability of observing inflation differentials across income groups increases when there are high income inequality and high food inflation in an economy. In addition, high inflation environment and frequent supply shocks may increase this probability more. Therefore, we may observe inflation differentials across income groups more in developing countries. As a result of this, we may observe difference between nominal and real inequality measures. We examine inflation differentials across income groups and their effect on Gini coefficient in Turkey for 2003-2018 by using Household Budget Survey (HBS) and consumer price data of TurkStat. We find that poor households experience slightly more inflation than rich households on average in 2003-2015. However, rich households experience slightly more inflation than poor households on average after 2015 and during 2003-2018 in Turkey. As income gap widens, inflation difference changes in detriment of poor households. Increase in inflation of transportation plays an important role in changing sign of inflation differentials across poor and rich households after 2016. Moreover, we conclude that real Gini coefficient is not statistically different from nominal Gini coefficient since inflation differentials across income groups are not statistically significant in Turkey during 2003-2018.