Working Paper
When do Relative Prices Matter for Measuring Income Inequality?

Changes in the relative prices of commodities consumed in different shares across income groups are known to influence real measures of inequality. Using household budget survey and price data in Mozambique from 2002/03 and 2008/09, we show that accounting for the relative price changes driven by the food and fuel price crisis substantially increases real inequality, by about two Gini points. This result is obtained by computing a price deflator that explicitly reflects divergent price dynamics of different product categories. The difference in measured inequality is larger in regions where consumers are more dependent on imported food, particularly those in urban and southern areas of the country. Since the main factors driving this result prevail in other countries, the approach points to the likelihood of widespread underestimation of inequality as a result of the secular increase in basic food prices observed since about 2000, and sharp increases experienced during the 2007–09 food and fuel price crisis.