Keep it real: Measuring real inequality using survey data from developing countries

This paper investigates how two effects drive wedges between nominal and real inequality estimates. The effects are caused by (i) differences in the composition of consumption over the income distribution coupled with differential inflation of consumption items; and (ii) quantity discounting effects for the non-poor. Household-specific deflators are estimated using 15 surveys collected in six countries in the period 1999-2011. In some countries (Mozambique, Tanzania, Malawi, and Pakistan), nominal inequality is lower than real inequality. In other countries (Ethiopia and Madagascar), no differences are found. Finally, I argue that poverty estimation based on national account consumption means and estimates of inequality from consumption surveys should employ real, rather than nominal, inequality estimates. This increases the level and reduces the decline of poverty over time, but the magnitude of the adjustment is country- and year-specific.