Did the Cost of Living Rise Faster for the Rural Poor?

Shireen AlAzzawi

No 1091, Working Papers from Economic Research Forum

Abstract: Inflation has been rising in Egypt over the last decade reaching double digit levels. It was more pronounced in rural Egypt and might have hurt the poor especially since rising food prices were a major factor behind higher prices over this period. Since the poor spend more of their budget on necessities than the rich, it is plausible to expect that the cost of living might have increased faster for households at the lower end of the income distribution. Rising prices, as measured by the Consumer Price Index (CPI), do not accurately measure changes in the cost of living. When inflation is high, people resort to substitution to hedge themselves against a declining standard of living. To accurately monitor changes in the attaining a given utility level, not a fixed basket of goods, we construct True Cost of Living Indices(TCLI) and use them to examine whether households at different income and expenditure levels experienced different rates of cost of living changes, and whether one group consistently fared worse than the others. We also examine the extent of the substitution bias in the CPI and how it might affect the measurement of key economic variables when compared over time. Results confirm that cost of living increases have been higher in rural regions, whether measured by the CPI or the TCLIs constructed in this study, than in urban regions. However, we found far larger regional disparities in cost of living increases over time using the TCLIs than what the CPI indicates. The substitution bias in the CPI is quite substantial ranging from 0.5 to 3 percentage points per year. This can lead to very large biases in real economic indicators when deflated via the CPI, vs. the TCLI. Finally, we find strong evidence that the households at the bottom of the income distribution fared much worse than those in the top quintiles. This is even more pronounced for the poorest rural households whose cost of living increases were 2.6 percentage points higher than the richest urban households on average for all regions over the period under study.

Pages: 37
Date: 2017-04-05, Revised 2017-04-05
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