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The plutocratic bias in the CPI: Evidence from Spain (El sesgo plutocrático del IPC: Evidencia española.)

Javier Ruiz-Castillo (), Mario Izquierdo () and Eduardo Ley

No 99-15, Working Papers from FEDEA

Abstract: We define the plutocratic bias as the difference between the inflation measured according to the current official CPI and a democratic index in which all households receive the same weight. (i) We estimate that during the 1990s the plutocratic bias in Spain amounts to 0.055 per cent per year, or about one third of the classical substitution bias estimated by the Boskin Commission for the U.S. (ii) We find that a 16-dimensional commodity space can be conveniently reduced to 3 dimensions, consisting of a luxury good and two necessities. The price behavior of these 3 goods provides a convincing explanation of the oscillations experimented by the plutocratic bias. (iii) Finally, the fact that the plutocratic bias is positive during this period, implies that the change in money income inequality is between 2 and 5 per cent greater than the change in real income inequality. We study the robustness of these results to the time period considered and to the definition of the group index which serves as an alternative to the CPI. We estimate that during the 1980s and the second part of the 1970s in Spain, the plutocratic bias is 0.033 and 0.239 per cent per year, respectively.

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