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Poor households and the weight of inflation

Author: Schulz-Gebhard, Jan,Ipsen, Leonhard
Publisher: Bamberg: Bamberg University, Bamberg Economic Research Group (BERG)
Year: 2025
DOI: 10.20378/irb-108327
Source: https://www.econstor.eu/bitstream/10419/319883.2/1/berg-wp205.pdf
Schulz-Gebha d, Jan; Ipsen, Leonha d
Wo king Pape
Poo households and he weigh o in la ion
BERG Wo king Pape Se ies, No. 205
P o ided in Coope a ion wi h:
Bambe g Economic Resea ch G oup, Bambe g Uni e si y
Sugges ed Ci a ion: Schulz-Gebha d, Jan; Ipsen, Leonha d (2025) : Poo households and he weigh
o in la ion, BERG Wo king Pape Se ies, No. 205, Bambe g Uni e si y, Bambe g Economic Resea ch
G oup (BERG), Bambe g,
h ps://doi.o g/10.20378/i b-108327
This Ve sion is a ailable a :
h ps://hdl.handle.ne /10419/319883.2
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Poo Households and he Weigh o In la ion
Jan Schulz and Leonha d Ipsen
Wo king Pape No. 205
Ap il 2025
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Poo Households and he
Weigh o In la ion
Jan Schulz1 Leonha d Ipsen1, 2
ja[email p o ec ed]
leonha d.ipsen@uni-bambe g.de
1Economics Ins i u e, Uni e si y o Bambe g
2Bambe g Resea ch T aining G oup on Bounded Ra ionali y,
He e ogenei y and Ne wo k E ec s
Abs ac
We a gue ha mos o he exis ing li e a u e on in la ion inequali y misses an essen ial sou ce o
dispa i y by ocusing on di e ences in expendi u es while igno ing he e ec o a p ice change on
he pu chasing powe o households’ incomes. As a emedy, we p opose weigh ing p ice changes by
income a he han by expendi u e, as is commonly done. We heo e ically de i e why, unde income-
weigh ing, lowe -income households a e disp opo iona ely a ec ed by any change in p ices. This
p oposi ion is alida ed empi ically o 21 EU coun ies using cu en sec o -le el inpu -ou pu da a.
Ou app oach allows o econcile he con lic ing e idence in he li e a u e on in la ion inequali y
ega ding s uc u ally highe in la ion pe cep ions and expec a ions o lowe -income households.
Ul ima ely, hese indings call o a b oad eassessmen o cu en app oaches o measu ing in la ion
and income inequali y.
Keywo ds: In la ion, Inequali y, Inpu -ou pu Analysis, Eu ope
JEL: E31, D31, C15, C67, D90
Acknowledgemen s: We hank Lau a Egelmee s, Claudius G äbne -Radkowi sch, Simon G o he,
Geo g Max on, Pa ick Mok e, Cal in Röhl and F ank Wes e ho as well as he pa icipan s o he
2024 annual mee ing o he Keynes Socie y in Bambe g, o he 36 h EAEPE annual con e ence in
Naples, he 2024 Young Economis Con e ence in Vienna, o he 2024 Wo kshop on Economics wi h
He e ogeneous In e ac ing Agen s in Bambe g and o he 5 h Plu alumn* wo kshop in Duisbu g o
aluable commen s a c ucial junc ions o his in es iga ion. We also hank Luis D echsel and Daniel
Hilbinge o hei excellen esea ch assis ance. Ipsen g a e ully acknowledges unding by he Hans-
Böckle -Founda ion h ough g an PK045 and Schulz g a e ully acknowledges unding by he
Ge man Fede al Minis y o Educa ion and Resea ch h ough he g an DATIPilo o he p ojec “e-
le nen”.
�.In oduc ion
We a gue ha mos o he exis ing li e a u e on in�a ion inequali y misses an essen ial
sou ce o dispa i y by ocusing on di�e ences in expendi u es while igno ing he e�ec o
a p ice change on he pu chasing powe o households’ incomes. In con as , he income-
weigh ing o p ice changes o�e s a uni�ed explana ion o wo puzzles in he exis ing
esea ch on in�a ion inequali y: Fi s , he appa en gap be ween pe cei ed in�a ion
exposu e o poo e households (S an che a ����) ela i e o he ambiguous esul s in
empi ical s udies (Ga cima ín, As udillo, and Ma ínez ����). Second and ela edly, he
s uc u ally highe in�a ion expec a ions and pe cei ed exposu e o lowe -income house-
holds (D’Acun o, Malmendie , and Webe ����; Fo ana, Pa zel , and Reis ����). These
pe cep ions and belie s a e ha d o a ionalize, since ela i e exposu e should depend
on he ype o good ha is a�ec ed by a p ice shock and should disp opo iona ely a�ec
highe -income households whene e p ices o luxu y goods inc ease disp opo iona ely.
Empi ical s udies on in�a ion inequali y commonly weigh p ice changes by house-
holds’ expendi u e sha es, e�ec ing income-dependen di�e ences in consump ion bas-
ke s. Consequen ly, expendi u e weigh s only cap u e he loss o pu chasing powe o
he sha e o income alloca ed o expendi u es. Ye , expendi u e weigh ing is employed o
cons uc eal wages, e en hough wages as income s eams ep esen bo h ealized and
po en ial uses o his income. In con as , he income-weigh ing o p ice changes e�ec s
he loss o he pu chasing powe o a household’s o al income. Technically, income-
weigh ing esul s om mul iplying expendi u e weigh s by he household’s p opensi y
o consume. Since lowe -income households consis en ly exhibi highe p opensi ies
o consume ou o cu en income, poo e households expe ience a mo e signi�can
educ ion in hei po en ial uses o nominal income as consump ion baske s become
mo e expensi e. Income-weigh ing hus a ionalizes he s uc u ally highe in�a ion
pe cep ions and expec a ions o lowe -income households.
We s a by o mally showing ha , ollowing a change in p ices, he commonly applied
expendi u e-weigh ing only cap u es he loss o pu chasing powe o he sha e o income
alloca ed o expendi u es, while, con as ingly, income weigh s cap u e he pu chasing
powe loss o a household’s en i e income. A di ec co olla y o his a gumen is ha
cons uc ing eal wages by de�a ing nominal wages wi h an expendi u e-weigh ed p ice
le el — as is cu en ly done — isks masking a subs an ial sha e o pu chasing powe loss
(o gain), and hus obscu ing ealized income inequali y. Technically, income-weigh ed
in�a ion a es esul om scaling p ice changes by he households (income-dependen )
p opensi y o consume. We make use o his ela ionship by es ima ing how in�a ion
a es a y along he income dis ibu ion o he expendi u e- and income-weigh ed case,
espec i ely. In doing so, we a e able o sepa a e he e�ec s o he decision wha o con-
sume om he e�ec s o he decision how much o consume ou o cu en income –
�

add essing a majo conce n exp essed in he li e a u e abou he use o income weigh s.
The decomposi ion e eals ha unde income-weigh ing, lowe -income households a e
disp opo ionally exposed o e e y change in p ices. This is because he p opensi ies o
consume eac much mo e s ongly o income changes han he expendi u e sha es o
speci�c p oduc s. We hen empi ically es ou p oposi ion, using a sec o -le el cos -push
in�a ion amewo k p oposed in Ipsen and Schulz (����). Wi hin his amewo k, we
in es iga e he e�ec s o income-weigh ed p ice shocks o a se o �� EU coun ies. While
Ipsen and Schulz (����), based on expendi u e-weigh s, �nd ha he di ec ion and mag-
ni ude o income-dependen in�a ion inequali y is condi ional on he sec o al o igins
o p ice shocks, we �nd ha unde income-weigh ing, lowe -income households a e
sys ema ically o e exposed o p ice shocks i espec i e o hei sec o al o igin. E en an
ad e se shock o he p ice o a luxu y good hus disp opo iona ely a�ec s poo e -income
households. This esul is in line wi h ou heo e ical p oposi ions. Ou �ndings help
econcile he con�ic ing e idence in he li e a u e on in�a ion inequali y and call o
a eassessmen o p e ious �ndings in his a ea o esea ch as well as he esea ch on
income inequali y mo e gene ally.
The emainde o his pape p oceeds as ollows: Sec ion �ou lines he ela ed li e a-
u e. Sec ion �discusses he ela ion o expendi u e- e sus income-weigh ed in�a ion
a es and in oduces a no el elas ici y decomposi ion o income-weigh ed p ice shocks.
Sec ion �desc ibes he da a and model used o he empi ical analysis. Sec ion �p esen s
he esul s while Sec ion �concludes wi h �nal ema ks and pe spec i es o u u e
esea ch.
�.Rela ed Li e a u e
Ou s udy connec s o se e al s ands o esea ch. Mos c i ically, i aims o explain wo puz-
zles in he exis ing li e a u e on in�a ion inequali y. Tha is � s , he appa en gap be ween
empi ical �ndings on income-dependen in�a ion exposu e o he pe cep ion o poo e
households eeling he mos exposed o p ice inc eases: While some s udies do sugges a
disp opo ional exposu e o lowe -income households (Claeys and Gue a-Jean enaud
����; Gü e and Weichen iede ����; Kaplan and Schulho e -Wohl ����; Sologon e al.
����), o he s epo p o-poo in�a ion (C aw o d and Old�eld ����), o ela i ely insigni�-
can di�e ences on a e age (Hobijn and Lagakos ����; Ipsen and Schulz ����). The esul s
in Ipsen and Schulz (����) sugges ha he di ec ion and magni ude o in�a ion inequali y
dependen s on he o igin and p opaga ion o a p ice shock. In line wi h hese ambiguous
esul s, some s udies epo a low pe sis ence o income-dependen in�a ion inequal-
i y (Hobijn and Lagakos ����; S asse e al. ����). Disag eemen can also be ound on
whe he highe in�a ion a es coincide wi h a wide dispe sion o in�a ion ac oss income
classes (Claeys and Gue a-Jean enaud ����; C aw o d and Old�eld ����; Hobijn and
�
Lagakos ����). Ga cima ín, As udillo, and Ma ínez (����) summa ize he �ndings on
income-dependen in�a ion inequali y as being inconclusi e. This is in ma ked con as
o he s ong pe cep ion o poo e households o be he mos exposed o in�a ion (Eas e ly
and Fische ����; S an che a ����).
Second, we o�e an explana o y a emp o he s uc u al di�e ences in income-
dependen in�a ion expec a ions and pe cei ed exposu e (D’Acun o, Malmendie , and
Webe ����). As poin ed ou by Fo ana, Pa zel , and Reis (����) hese di�e ences canno
sa is ac o ily be explained by income-dependen di�e ences in consump ion baske s.
P e ious explana ions conside ed he g ea e ocus o low-income households on ac ual
expenses and p ices paid, sho e �nancial planning ho izons, o lowe �nancial li e -
acy (B uin e al. ����). Howe e , he �ndings in P a i (����) e eal a obus connec ion
be ween households’ in�a ion pe cep ions and hei ma e ial sa is ac ion, sugges ing ha
pe sis en ly highe in�a ion pe cep ions among lowe -income households may indeed
ha e an unde lying economic a ionale.
We p opose ha he s uc u al bias in in�a ion pe cep ions and expec a ions can
be explained by e�ec ing he e�ec o a change in p ices on he pu chasing powe o
he o al income a he han ocusing solely on he sha e spen on expendi u es. While
expendi u e-based app oaches cap u e in�a ion inequali y a ising om di�e ences in
consump ion baske s (c . A gen e and Lee ����; Gü e and Weichen iede ����; Hobijn
and Lagakos ����; Kaplan and Schulho e -Wohl ����, o example), hey o e look ha
as consump ion baske s become mo e expensi e, poo e households expe ience a mo e
signi�can educ ion in hei po en ial uses o nominal income. As such expendi u e-based
app oaches isk masking a subs an ial gap o ealized in�a ion inequali y. As we show
below, his gap can be closed by scaling expendi u es by he households’ p opensi ies
o consume. The esul ing income weigh s e�ec he o al e�ec o a change in p ices
on he pu chasing powe o he households’ income. Since lowe -income households
de o e la ge ac ions o hei income o expendi u es, i.e. a e cha ac e ized by la ge
p opensi ies o consume (c . Schulz and Maye ho�e ����, o a e iew), income-weigh s
cap u e he s uc u ally g ea e loss o lowe incomes’ pu chasing powe ollowing a
change in p ices.
The p oposi ion o income-weigh ing ela es o he logic o Engel’s Law (Engel ����),
which holds ha as income inc eases, he sha e o income spen on necessi ies – especially
ood – declines (e en i he absolu e amoun ises). While ea lie s udies on Engel’s law
a e based on income weigh s (Engel and Kneip ����; Hamil on ����; Lese ����), cu en
empi ical wo k mos ly elies on expendi u e-based weigh s (c . Lewbel and Hou hakke
����, o a su ey). This e�ec s he conce n ha using income weigh s migh con ound
he es ima es o expendi u e decisions o di�e en goods ca ego ies wi h he decision o
spend o sa e a all (Ba igozzi e al. ����). As we show below, we a e able o add ess his
�
ca ea by in oducing a no el elas ici y decomposi ion o income-weigh ed p ice shocks.
The ollowing empi ical analysis in his pape connec s o ecen a emp s o explain
cos -push in�a ion dynamics and hei dis ibu ional dimensions (Fe ei a, Ab eu, and
Louçã ����). The ounda ional wo k o Webe e al. (����) and subsequen esea ch o
Ipsen, Aminian, and Schulz (����)� s demons a ed ha , o bo h he US and he EU, a
small numbe o key sec o s domina e p ice le els o consume s. Simila hemes appea
in Niki o os, G o he, and Webe (����) and Cucigna o, Ga bellini, and Fo a Alcalde (����),
which highligh he sec o al and ne wo k e�ec s o p ice shock ansmission. La e , Ipsen
and Schulz (����) sugges ed he pi o al ole o sec o ial asymme ies and p opaga ion
e�ec s in p oduc ion ne wo ks o modula ing in�a ion inequali y. To accoun o his, we
build on hei cos -push in�a ion amewo k o con as he in�a ion inequali y a ising
om p ice shocks unde expendi u e- e sus income-weigh ing. We show, using mo e
ecen da a han Ipsen and Schulz (����), ha income-weigh ing shi�s he ambiguous,
o igin-o -shock-dependen in�a ion exposu e o households o a s uc u al o e exposu e
o lowe -income households o any p ice change in he consump ion baske s. By ali-
da ing bo h s uc u ally highe in�a ion pe cep ions and expec a ions o lowe -income
households, income-weigh ing p esen a uni�ed explana ion o he in�a ion-inequali y
puzzles ega ding income-dependen in�a ion pe cep ions and expec a ions.
�.Weigh s o In�a ion
We s a his sec ion by o mally showing ha he commonly applied expendi u e-weigh ing
only cap u es me ely he loss o pu chasing powe o he sha e o income alloca ed o
expendi u es, while, income weigh s cap u e he loss o a household’s pu chasing powe
conce ning i s whole (cu en ) income. Le he absolu e expendi u es Co a household be
gi en by
C=↵⋅Y,(�)
wi h
↵
as i s a e age and ma ginal p opensi y o consume and Yas i s cu en income.
Then, he expendi u es o good ia e gi en by
Ci=✓i⋅C,(�)
wi h
✓i
as he expendi u e sha e o good iin he households consump ion baske . Assuming
no change in consump ion, he addi ional necessa y expendi u es in pe cen age e ms
aced by he household ollowing a p ice change o good iin pe cen age e ms
⇡i
a e gi en
by
%C=Ci⋅⇡i,(�)
�
wi h
⇡i
as a p ice shock o good i. Acco dingly, he loss o pu chasing powe o he house-
hold’s income is hen gi en by
%PPY=%C
Y
(�)
Subs i u ing gi es
%PPY=✓i⋅↵⋅Y⋅⇡i
Y=✓i⋅↵⋅⇡i.(�)
Thus, he loss o pu chasing powe o he household’s income is p opo ional o i s p open-
si y o consume, as well as he p ice shock and he expendi u e sha e in good i. Con as
his o he loss o pu chasing powe ela i e o o al expendi u es:
%PPE=✓i⋅↵⋅Y⋅%Pi
↵⋅Y=✓i⋅C⋅%Pi
C=✓i⋅⇡i
(�)
This case co esponds o he expendi u e weigh ing used ypically employed in s udies o
in�a ion inequali y bu ails o conside he loss o pu chasing powe o a household’s o al
income. The quan i ies

%PP
Y
and

%PP
E
hus answe wo di�e en ques ions: While he

%PP
Y
indica es how much income would need o g ow o co e he inc eased expendi-
u es esul ing om a p ice shock,

%PP
E
shows how much expendi u es would need o in-
c ease. Since expendi u es and cu en income ypically do no coincide,

%PP
Y≠
%PP
E
in gene al.
No e ha he assump ion o a �xed
↵
and
✓i
, i.e., no change o consump ion beha io
in esponse o he p ice shock, leads o upwa ds-biased es ima es o he in�a iona y
impac ( on Aue and Shumskikh ����). This is because Laspey es indices use base-pe iod
weigh s and hus canno ake any kind o subs i u ion in o accoun . Since we a e in e es ed
in in�a ion inequali y, his bias is unp oblema ic, hough: As subs i u ion possibili ies a e
gene ally highe o iche households (Ipsen, Aminian, and Schulz ����), we unde s a e
in�a ion inequali y using base-pe iod weigh s. Ou es ima es can hus be conside ed
lowe bounds o he ac ual impac on in�a ion inequali y.
Equa ion � es a es he abo e ela ionship o a single p ice shock o good i o he
o e all p ice le el. As in he p e ious case, le
✓i
be a households expendi u e weigh on
good i, ha is i s expendi u es C
i
o e he o al expendi u es C. The household’s income is
gi en by Y, while
↵
desc ibes i s p opensi y o consume.
⇡i
gi es he g ow h a e o he
p ice le el o good iin a se o ngoods. I ollows ha
↵⇡e=↵
n
�
i=�
✓i⇡i=C
Y⋅
n
�
i=�
Ci
C⇡i=
n
�
i=�
Ci
Y⇡i=⇡y.(�)
�
������ �. Elas ici y es ima es o expendi u e-weigh ed (le�) and income-weigh ed p ice
shocks o he sec o al ca ego ies in he FIGARO da abase o ���� based on eg ession
equa ion �� wi h a coun y dummy.
��

plausibili y o ou app oach, as he g ea es exposu e o lowe -income households s ems
om he ca ego ies o necessi ies. A he same ime, he highes elas ici ies can be ound
o luxu y i ems. Fu he mo e, and in line wi h he esul s o (Ipsen and Schulz ����), we
�nd he he e ogenei y in he p oduc ion ne wo k e�ec o be much smalle han o he
di ec e�ec s. Technically, his implies ha subs an ial in�a iona y p essu es p opaga e
om sec o s wi h la ge income-dependen di�e ences in consump ion o sec o s wi h
smalle di�e ences (c . sec ion �). As a consequence o his di�usion p ocess, he pos-
sibili ies o subs i u ing away om sec o s wi h p ice inc eases migh be se e ely mo e
limi ed han wha one migh ini ially expec looking only a di�e ences in expendi u e
sha es.
The igh -hand side o Figu e � epo s he co esponding elas ici y es ima es o he
income-weigh ed speci�ca ion. I shows ha , ollowing a p ice shock, he pu chasing
powe o lowe incomes declines disp opo ionally no ma e he sec o o o igin. The
numbe s sugges ha elas ici ies a e shi�ed owa ds a g ea e exposu e o lowe incomes
by a cons an ac o . This is in line wi h ou heo e ical de i a ion in sec ion �, whe e
we sugges ed ha he es ima e
ˆ
y
�≈+
, i.e., he es ima ed elas ici y coe�cien can
be addi i ely decomposed in o he income elas ici y o he espec i e expendi u e sha e

and o he income elas ici y o he p opensi y o consume

. A nega i e
ˆ
y
�<
� o all
sec o classes implies ha e en o
>
�,
<
�and
��>> ��
. Technically, lowe incomes
a e disp opo ionally exposed unde income weigh ing since he p opensi ies o consume
eac much mo e s ongly o income changes han he expendi u e sha es o speci�c
p oduc s (e en o luxu y goods).
To subs an ia e his claim and o examine whe he he e exis s e.g. some unan icipa ed
in e ac ion be ween

and

, we es ima e
ˆ

sepa a ely om he below equa ion o see,
i he es ima es indeed co espond o
ˆ
y
�−
ˆ
e
�
, as he heo y ou lined in sec ion �would
sugges . The eg ession equa ion o be es ima ed by OLS o ˆ
is gi en by
log(↵c,q)=�+log(Yc,q)+c+✏c,q,(��)
wi h cas he coun y and qas he quin ile o he income dis ibu ion in c o he APC
↵
and
income Yand again using a coun y-dummy
c
o consis ency wi h he basic eg ession
equa ion (��). We es ima e ha ˆ
≈−�.����.
The esul s a e shown in Figu e �. The es ima e o
ˆ

is gi en as a line, while he
di�e ence in es ima es o all sec o s
ˆ
y
�−
ˆ
e
�
is gi en as poin s. The heo y aligns wi h he
es ima ed di�e ence ema kably well, wi h he highes downwa ds de ia ion being �.�� o
Fo he income-weigh ed speci�ca ion, he ela i e impo ance o sec o s emains asymme ic. Howe e ,
o income-weigh ing, he a e age exposu e o Q�households o any p ice shock is la ge han he exposu e
aced by Q�, in line wi h ou co e a gumen .
��
������ �. Di�e ences in elas ici y es ima es o expendi u e and income weigh s ( o
he o al e�ec ) o each sec o compa ed o he es ima e o he income elas ici y o he
a e age p opensi y o consume ˆ
≈−�.����.
��
he elas ici y di�e ence o Pos al and cou ie se ices and he highes upwa ds de ia ion
o �.�� o he elas ici y di�e ence in Telecommunica ions. An immedia e co olla y o his
is ha he ela i e anks o es ima es based on income weigh s (almos ully) co espond
o he ela i e anks o es ima es based on expendi u e weigh s wi h e.g. he eal es a e
sec o ha ing he mos nega i e elas ici y in bo h cases. Income-weigh ing is he e o e
consis en wi h bo h he no ion ha cos -push shocks a�ec he poo disp opo iona ely
in gene al and ha his di�e en ial exposu e is highes o necessi ies. Figu e �indica es
ha i is indeed he highe income elas ici y o he APC ha d i es p o- ich in�a ion o
income-weigh s. Neglec ing he consump ion and sa ings decisions o households migh
hus unde es ima e he ex en o which poo households expe ience in�a ion exposu e.
�.Conclusion
The ex an li e a u e on income-dependen in�a ion inequali y p o ides wo empi ical
puzzles: Fi s , i con inues o yield con�ic ing �ndings ega ding i s di ec ion, magni ude,
and pe sis ence, while, a he same ime, poo e households consis en ly pe cei e hem-
sel es as he mos a�ec ed by ising p ices. Second and ela edly, i ails o sa is ac o ily
explain he consis en ly highe in�a ion expec a ions o lowe -income households. We
a gue ha he income-weigh ing o p ice changes p esen s a uni�ed explana ion o hese
puzzles. In con as o he common expendi u e-based app oaches o in�a ion inequali y,
income weigh ing e�ec s he loss o pu chasing powe o a household’s o al income as
opposed o conside ing only he sha e o income alloca ed o expendi u es.
In his pape , we showed ha income-weigh ing esul s om scaling expendi u e
weigh s by he household’s p opensi y o consume. We made use o his ela ionship o
es ima e how he impac o p ice shocks a ies along he income dis ibu ion o he
expendi u e-weigh ed e sus income-weigh ed case. In doing so, we we e able o sepa a e
he e�ec s o he decision on wha o consume om he e�ec s o he decision on how
much o consume om cu en income. Since, empi ically, he p opensi ies o consume
eac much mo e s ongly o income changes han he expendi u e sha es o speci�c
p oduc s, he decomposi ion e ealed ha unde income-weigh ing, lowe -income house-
holds a e disp opo ionally exposed o e e y cos -push p ice shock. Using a sec o -le el
cos -push in�a ion amewo k, we showed he empi ical e�ec s o income-weigh ing
using ecen da a o �� EU coun ies. The analysis con� med ou p oposi ion o a sys-
ema ic o e exposu e o lowe incomes, econciling con�ic ing esul s in he li e a u e
on income-dependen in�a ion inequali y. Ou esul s alida e he in�a ion pe cep ion
and expec a ion biases o lowe -income households, cas ing doub on explana o y ap-
p oaches based me ely on cogni i e di�e ences such as �nancial illi e acy o sho e
�nancial planning ho izons o poo e households. On he con a y, hese esul s call o a
ee alua ion o p e ious empi ical �ndings on in�a ion and income inequali y as well
��
as policies o add ess he dis ibu ional ha dships in imes o highe in�a ion. Mo eo e ,
nex o di�e ences in he capaci ies o subs i u e, he p opensi ies o consume cons i u e
a second and o�en o e looked explana o y ac o o in�a ion exposu e (see Sologon e al.,
����, o a no able excep ion). Jus as weal hie households a e cha ac e ized by g ea e
�exibili y o swi ch o cheape goods, hey can dec ease hei in�a iona y exposu e by
educing hei consump ion p opensi y. Meanwhile, poo e households exhibi lowe
o e en nega i e subs i u ion, i.e. hey a e inc easing hei ela i e spending on a good
as i s p ice ises (Hobijn and Lagakos ����; Kaplan and Schulho e -Wohl ����; S asse
e al. ����) and simul aneously ha e o dig in o sa ings o mee hei necessi ies (Bobasu,
Cha alampakis, and Kou a as ����; Sologon e al. ����). This, in u n, inc eases hei
p opensi y o consume and hus hei exposu e o in�a iona y shocks. Since we a e using
a Laspey es index, ou elas ici y es ima es hus cons i u e a lowe bound, as we canno ac-
coun o hese subs i u ion esponses in di ec esponse o a p ice shock by cons uc ion
ha a e mo e p e alen o iche households.
This s udy comes wi h a se o limi a ions. One complica ing ac o in ou empi ical
model is he assump ion o a Leon ie p ice model as in Webe e al. (����). The model
p esupposes a �:�pass- h ough o p ice shocks o cus ome s, po en ially o e s a ing shock
p opaga ion i � ms adjus hei ma gins o modi y p oduc ion p ocesses (c . Pichle e al.
����). Recen schola ship u he indica es ha wi hin-indus y consump ion di�e ences
and subs i u ion beha io can play a subs an ial ole o in�a ion asymme ies ac oss
households (Ja a el ����; S asse e al. ����; A gen e and Lee ����). A he indus y le el,
igno ing subs i u ion e�ec s may no d ama ically in�a e agg ega e shock p opaga ion
(Dup ez and Mage man ����), bu i can mask impo an c oss-sec o al he e ogenei ies.
Fu u e ad ances could d aw on me hods such as Pichle e al. (����), who inco po a e
modi�ed Leon ie p oduc ion unc ions o e�ec a ying inpu dependencies. Mo eo e ,
ou empi ical analysis add esses only cos -push in�a ion, hus neglec ing o he po en ial
d i e s, such as demand-led in�a ion. A desi able pa h o u u e esea ch would, he e-
o e, be o add ess he e�ec s o income-weigh ing o di�e en in�a iona y dynamics.
Finally, ou analysis does no accoun o he weal h channel o in�a ion (e.g., he e�ec s
on asse holdings), which can also con ibu e o unequal in�a ion ou comes (Adam and
Zhu ����; Bobasu, Di Nino, and Osba ����; Doepke and Schneide ����). Despi e hese
limi a ions, income weigh ing appea s o be a p omising explana ion o he disc epancy
be ween schola ship and public pe cep ions ega ding in�a ion inequali y. E en mo e
c i ically, income-weigh ing sugges s ha he cu en p ac ice o cons uc ing eal wages
by de�a ing nominal wages wi h an expendi u e-weigh ed p ice le el isks masking a
subs an ial sha e o pu chasing powe loss (o gain). Ul ima ely, his calls o a b oad
eassessmen o cu en app oaches o measu ing in�a ion and income inequali y.
��
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��
Appendix A. B idging Inpu -ou pu and Consump ion Da a
In his sec ion, he p ocess o mapping COICOP consump ion by pu pose da a (Eu os a )
o FIGARO Inpu -ou pu da a (Eu os a ) is desc ibed. This p ocess is based on b idging
ma ices p o ided by Cai and Vandyck (����). Using inpu da a o he base yea o ����,
he au ho s cons uc b idging ables be ween �� consump ion by pu pose ca ego ies and
�� p oduc s by ac i i y (CPA) ca ego ies o �� Eu opean coun ies.
�
The �� CPA ca ego ies
a e ully aligned wi h he classi�ca ion o economic ac i i ies (NACE Re . �) used in he
FIGARO indus y-by-indus y Inpu -ou pu ables (Eu os a n.d.).
�
The e o e, we can use
hese b idging ma ices o in eg a e he consump ion expendi u e by income quin ile
based on COICOP ca ego ies wi h he FIGARO Inpu -ou pu da a (bo h Eu os a ).
The coun y speci�c b idging ables a e s uc u ed as ollows:
Rows (��): CPA ca ego ies
Columns (��): COICOP ca ego ies o consump ion by pu pose
Cells: Final consump ion expendi u e o households by consump ion pu pose in million
Eu o, cu en p ices
In he � s s ep, he h ee-digi le el COICOP ca ego ies in he coun y-speci�c b idging
ables we e educed o he wo-digi le el by summing o e he columns belonging o a
pa en wo-digi ca ego y. This was done o ma ch he wo-digi g anula i y o he income-
dependen consump ion da a and educes he ini ial ��x�� able o ��x��. In he nex
s ep, en ies in he coun y-speci�c b idging ables we e mul iplied pai wise wi h he
co esponding coun y-quin ile-speci�c expendi u e sha es o each COICOP ca ego y
aken om he Eu os a da a on consump ion expendi u e by income quin iles. A�e wa d,
ow sums we e aken, be o e no malizing hese o one. This yielded a �x�� ec o o
sec o -le el coun y-quin ile speci�c expendi u e sha es:
✓q,c,j
. Each en y o his ec o
co esponds o he expendi u e sha e o quin ile qo coun y cin sec o j.
Now, o in eg a e hese in o he FIGARO Inpu -ou pu da a, we � s compu ed coun y-
sec o -speci�c expendi u e sha es based on he demand ec o in he FIGARO da a. This
gi es
✓c,j,d
: he sha e o o al expendi u es Cby households o coun y cin sec o
j
o
coun y d, ela i e o hei o al expendi u es in all sec o s
j
o e all coun ies in he
FIGARO da a:
�
Due o missing da a, he inpu da a o Bulga ia and I eland is based on he yea o ����, while o Mal a
i is ����.
�
FIGARO Inpu -ou pu da a ini ially dis inguishes �� ca ego ies. Howe e , he p oduc / indus y ca ego y
ela ing o ex a e i o ial o ganiza ions and bodies (Code U) usually con ains no en ies and is he e o e o
no ele ance o his p ocess.
��
✓c,j,d=Cc,j,d
∑n
d=�Cc,j,d
(A�)
Finally, mul iplying he sec o -le el coun y-quin ile speci�c expendi u e sha es
✓q,c,j
wi h he coun y-sec o speci�c demand sha es
✓c,j,d
yields a demand ec o con aining
he coun y-quin ile speci�c expendi u e sha e in sec o jo coun y d:✓q,c,j,d.
No e ha a necessa y assump ion unde lying his p ocess is ha income quin iles
di�e in hei ela i e consump ion in sec o
j
e sus sec o i, bu do no di�e in hei
ela i e consump ion in sec o
j
o coun y d o sec o
j
in coun y c. Mo e speci�cally, in
ou model, asymme ies be ween income quin iles a ise due o households consuming
di�e en ly (e.g., ha ing di�e en expendi u e sha es o ood p oduc s), and no because
o how much o he ood p oduc s come om domes ic e sus o eign sec o s o ood
p oduc ion. Fo example, in ou model, bo h low- and high-income households in Spain
spend he same pe cen age o hei expendi u es on ood in he F ench sec o o manu-
ac u ing ood p oduc s. Howe e , since low-income households in Spain spend a g ea e
sha e o hei o al expendi u es on ood p oduc s, hei exposu e o he F ench sec o o
manu ac u ing ood p oduc s is g ea e (as is hei exposu e o he espec i e domes ic
sec o ). Thus, exposu e o o eign e sus domes ic sec o s migh s ill di�e ac oss income
g oups in ou model. To see his, conside ano he example: Na u ally, in he sec o o eal
es a e ac i i ies he sha e o domes ic ela i e o o eign “consump ion” by households
is g ea e han o ex ile p oduc s. While lowe -income households ha e a ela i ely
highe expendi u e sha e in he sec o o eal es a e ac i i ies, highe -income households
ha e a ela i ely highe expendi u e sha e in ex ile p oduc s. The e o e, he exposu e o
(in e )na ional shocks in ou model will s ill be asymme ic.
��
������ A�. Elas ici y es ima es o expendi u e-weigh ed empi ical p ice shocks o he
sec o al ca ego ies in he FIGARO da abase o ���� based on eg ession equa ion �� wi h
a coun y dummy.
��

E.�. Elas ici y Es ima es o Uni Shocks
������ A�. Elas ici y es ima es o expendi u e-weigh ed uni p ice shocks o he sec o al
ca ego ies in he FIGARO da abase o ���� based on eg ession equa ion �� wi h a coun y
dummy.
��
������ A�. Elas ici y es ima es o income-weigh ed uni p ice shocks o he sec o al
ca ego ies in he FIGARO da abase o ���� based on eg ession equa ion �� wi h a coun y
dummy.
��
Appendix F. A e age E�ec s pe Sec o Class o Quin ile �&�
������ A�. A e age di ec and indi ec sec o e�ec s (%) o quin ile �and � o he
expendi u e-weigh ed (le�) and income-weigh ed case ( igh ). A e ages a e aken o e ��
EU coun ies.
��
Appendix G.
A e age E�ec s pe Sec o Class o Quin ile �&�– Expendi u e
Weigh s
Sec o Code Di ec E�ec (Q�) Di ec E�ec (Q�) Indi ec E�ec (Q�) Indi ec E�ec (Q�) A e age P ice Shock (%)
A�� �.�×��−��.�×��−��.�×��−��.�×��−��.���
A�� ���.�×��−����.�×��−����.�×��−����.�×��−��.���
A�� ���.�×��−����.�×��−����.�×��−����.�×��−��.���
B�.�×��−����.�×��−��.�×��−��.�×��−��.���
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based on expendi u e weigh s (%). Las column gi es a e age p ice shock o a sec o class.
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Appendix H. A e age E�ec s pe Sec o Class o Quin ile �&�– Income
Weigh s
Sec o Code Di ec E�ec (Q�) Di ec E�ec (Q�) Indi ec E�ec (Q�) Indi ec E�ec (Q�) A e age P ice Shock (%)
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based on income weigh s (%). Las column gi es a e age p ice shock o a sec o class. See
Appendix K o co esponding sec o labels.
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Appendix I.
Elas ici y Es ima es o Expendi u e-weigh ed In�a ion Inequali y
Sec o Code Di ec Indi ec To al
Es ima e ��% CI Es ima e ��% CI Es ima e ��% CI
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