Inflation Gap between Households of IRAN in Urban Areas

This paper attempts to employ microeconomics methodology to answer the following questions: For which group of society the consumption pattern which is used as a basis to calculate consumer price index (CPI) and inflation rate, stands for is there any difference between inflation rate of poor and rich households in IRAN? Calculations done in this paper show that the consumption pattern which belongs to CPI basket (2004) is close to household consumption pattern which is in the 8th decile of expenditure distribution. Beside the conventional method of calculating expenditure shares of items included in CPI basket, the democratic method is provided to all households to have equal importance (weight) in creating CPI basket. the expenditure share of items included in CPI basket is a simple average of the expenditure share of items across households.In the democratic approach, the expenditure pattern of each household is considered in equal measure in determining the CPI index. The difference between CPI(inflator rate) calculated according to the above mentioned methods is called as CPI (inflation gap) or Plutocratic gap. Analysis of this gap shows that negative plutocratic gap implies higher inflation rates for households with low expenditure (the poor).The obtained results of calculating inflation gap during 1369-1385 (1990- 2006) in IRAN show that in this long period (except the years 1373 and 1374) inflation rate of household with lower expenditure (the poor household) is higher than that of household with higher expenditure (the rich household). This gap is increased when we include CPI quality adjustment.