The visible hand in economics

Real income, poverty, and a tiered CPI

Posted on: November 30, 2008

According to a recent book by Christian Broda and David E. Weinstein (Prices, Poverty, and Inequality: Why Americans are Better Off Than You Think) (ht Marginal Revolution) growth in income inequality was less pronounced in the US because of changes to the quality and cost of goods that “poor” people purchased.

This indicates to me that a tiered consumer price index could be a useful thing.  Currently the household economic survey (HES) provides an annual tiered income measure (where we see the average income of different income deciles).  However, this nominal measure is not particularly useful if the change in prices experienced by different groups are very diverse.

As a result, a similarly tiered CPI measure (so a CPI for each income decile) would actually give us a much better way to figure out change in “real income” and thereby a fairer measure of the distribution of real income – which is something we care about.

Surely the HES has a measure of purchases by different income groups.  As the CPI is broken down into different products it should be possible to take these weights and come up with a loose set of indicies that represent the price inflation faced by different income declines shouldn’t it?


4 Responses to "Real income, poverty, and a tiered CPI"

I doubt you would get different inflation tracks.

There used to be a ‘senior citizen price index’ as a subset of the CPI, but it was canned when it showed virtually no difference from the headline measure.

“I doubt you would get different inflation tracks.”

Really – but with the relative price of appliances falling, and with the relative price of fuel and food rising, I am sure that different income brackets are facing different “inflation rates”.

Isnt it the goal of those in the lower tier to be consuming similar to those on the higher tier?

“Isnt it the goal of those in the lower tier to be consuming similar to those on the higher tier?”


I agree with the implicit argument that looking at income is not the same as looking at lifetime purchasing power – as income changes, the composition of goods consumed change, and wealth changes.

However, as an indicative measure, working out real incomes per tier is still more useful than what we have.

Remember, even if people wanted to consume the same bundles as other people, the income they actually earn is a constraint – by looking at what people in different income brakcets by we can get some indication of the substitution that occurs as we move between income brackets (especially if credit constraints and income uncertainty are big issues for households).

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