Local cost of living and the geography of inequality: evidence from Spain

Abstract Standard measures of poverty and income inequality often overlook how sharply the cost of living varies across places. To address this issue in the case of Spain, I develop a new public database of local consumer price indices tailored to the expenditure patterns of different income groups. Using these local CPIs to deflate household incomes between 2006 and 2023 reveals that national inflation adjustments understate the growth in inequality during the financial crisis and misrepresent poverty – overestimating it in rural areas and underestimating its impact in larger cities. The findings highlight the importance of accounting for spatial variation in prices in poverty and inequality measurement, with clear policy implications.