<p>Your intuition is entirely correct. Inflation is calculated based on a "standard basket", whereas real baskets vary among different consumers. As such, the incidence of changes in prices affect consumers differently. </p>

<p>A good treatment of the issue is <a href="https://www.ifs.org.uk/docs/oxbridge09_odea.pdf" rel="nofollow noreferrer">this piece</a> by the IFS, UK. Basically, distributional effects of inflation would not exists if:</p>

<ul>
<li>households buy the same</li>
<li>price of all items change equally</li>
</ul>

<p>As you can imagine, both are not true. The report calculates then the rate of inflation faced by different households, taking Sept of 2008 as example, leading to the following result:</p>

<p><a href="https://i.sstatic.net/1DoDx.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/1DoDx.png" alt="enter image description here"></a></p>

<p>This is, <strong>inflation can be very different across households.</strong> Check the document for more details and insights.</p>

<p>Finally, an example of a theoretical treatment (aka model) is <a href="https://ideas.repec.org/a/eee/moneco/v49y2002i4p761-795.html" rel="nofollow noreferrer">here</a>. The authors model a monetary economy where the cost of credit is a non-linear function of income, such that the rich have a lower cost per unit of credit. This means that rich buy their consumption with a greater proportion of credit than cash, compared with the poor. Then, as inflation is basically a tax on cash, this means the same inflation affects the rich and poor differently. In fact, inflation is regressive. This is a well-known fact in political discussions (e.g. <a href="https://www.cato-unbound.org/2013/12/02/jerry-l-jordan/inflation-regressive-tax" rel="nofollow noreferrer">here</a>).</p>

CC BY-SA 3.0
2017-01-28T17:19:27.957Z
2017-01-28T17:19:27.957Z
luchonacho
<p>CPI is measured against a single consumption basket. In reality, consumers each have their own set of consumption goods, so each face their own "individualized CPI" rates. </p>

<p>But how different are those "individual CPI rates"? Has there been work on this? </p>

<p>Why I'm asking: economists frequently state that investors should invest in "inflation-adjusted products" to hedge against inflation. The problem is, if each individuals' consumption basket is sufficiently different from that used to compute CPI, holding inflation-linked securities may not be a hedge, but rather introduce more risk. </p>

CC BY-SA 3.0
2017-08-23T12:37:55.417Z
Was my answer satisfactory?
luchonacho
<inflation>
Do heterogeneity in consumption baskets lead to very different inflation rates for different consumers?
J Li
# Do heterogeneity in consumption baskets lead to very different inflation rates for different consumers?

(Asked by: username_0 on 2016-05-29)

CPI is measured against a single consumption basket. In reality, consumers each have their own set of consumption goods, so each face their own "individualized CPI" rates.

But how different are those "individual CPI rates"? Has there been work on this?

Why I'm asking: economists frequently state that investors should invest in "inflation-adjusted products" to hedge against inflation. The problem is, if each individuals' consumption basket is sufficiently different from that used to compute CPI, holding inflation-linked securities may not be a hedge, but rather introduce more risk.

**Tags:** inflation
> **Comments:**
> **username_1**: Was my answer satisfactory?  

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## 1 answers

### Answer by username_1 on 2017-01-28. Score: 3

Your intuition is entirely correct. Inflation is calculated based on a "standard basket", whereas real baskets vary among different consumers. As such, the incidence of changes in prices affect consumers differently.

A good treatment of the issue is [this piece](https://www.ifs.org.uk/docs/oxbridge09_odea.pdf) by the IFS, UK. Basically, distributional effects of inflation would not exists if:

* households buy the same
* price of all items change equally

As you can imagine, both are not true. The report calculates then the rate of inflation faced by different households, taking Sept of 2008 as example, leading to the following result:

[![enter image description here](https://i.sstatic.net/1DoDx.png)](https://i.sstatic.net/1DoDx.png)

This is, **inflation can be very different across households.** Check the document for more details and insights.

Finally, an example of a theoretical treatment (aka model) is [here](https://ideas.repec.org/a/eee/moneco/v49y2002i4p761-795.html). The authors model a monetary economy where the cost of credit is a non-linear function of income, such that the rich have a lower cost per unit of credit. This means that rich buy their consumption with a greater proportion of credit than cash, compared with the poor. Then, as inflation is basically a tax on cash, this means the same inflation affects the rich and poor differently. In fact, inflation is regressive. This is a well-known fact in political discussions (e.g. [here](https://www.cato-unbound.org/2013/12/02/jerry-l-jordan/inflation-regressive-tax)).


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