Inflation and income distribution in Central America, Mexico, Panama, and the Dominican Republic

Abstract

AbstractAnalyses of the impact of inflation on income distribution typically only consider the general inflation rate. However, when the consumption structure of households is shaped by its income level and inflation varies across goods and services, they are affected differently by inflation. The aim of this study is to contribute to the analysis of this effect in Central American countries (Guatemala, El Salvador, Honduras, Nicaragua, and Costa Rica), Panama, Mexico, and the Dominican Republic (CAPMDR) for the period 2007–2018. According to our findings, there have been significant differences in the inflation rates faced by different income groups. By employing these percentile‐specific inflation rates, we have computed an “inflation‐corrected Gini index.” This adjustment is important because although inequality has been decreasing during past years in the countries in our sample, on average, about half of the gains observed using the standard Gini index are lost once the Gini indices are corrected for inflation, a clearly nonnegligible magnitude.