Taking Prices Seriously in the Measurement of Inequality.

In the measurement of inequality, adjustments for differences across households in their demographic composition and in the price regimes they face are usually very simple. Often, nominal income is adjusted with an income-independent price deflator and a price-independent equivalence scale. I show that using more flexible income-dependent price deflators and price-dependent equivalence scales affects the level of, and trend in, measured consumption inequality in Canada over 1978-1996. Whereas standard methods show a large increase in inequality over the eraly 1980s and a decrease over the mid 1990s, more flexible methods show a smaller increase over the early 1980s and no decrease over the mid 1990s.