Prais (1958) showed that the CPI computed by statistical agencies can be interpreted as a weighed average of household price indexes, the weight of each household determined by its total expenditures. We decompose the difference between the standard CPI and a democratically weighed index (i.e., the plutocratic bias) as the product of average income, income inequality, and the covariance between individual price indexes and a parameter related to each good's income elasticity. This decomposition allows us to interpret variations in the size and sign of the plutocratic bias, and also to discuss issues pertaining to group indexes.
Mr. Javier Ruiz Castillo, Mr. Eduardo Ley, and Mr. Mario Izquierdo
We define the plutocratic bias as the difference between inflation measured according to the current official CPI and a democratic index in which all households receive the same weight. We estimate that during the 1990s the plutocratic bias in Spain amounts to 0.055 percent per year. However, positive and negative biases cancel off when averaging over the whole period. The mean absolute bias is significantly larger, 0.090. We can explain most of the oscillations experimented by the plutocratic bias by the price behavior of three goods: a luxury good and two necessities.