Does Chinese Inflation Understate Cost of Living?

The Chinese consumer price index slightly overstates the increase in the cost of living and thus understates the growth in real income. Over the period 1995 to 2002, we find that the annual growth in median urban household income defl ated by the cost of living was 7%, which is close to the growth in real GDP during this time. When de flated by official CPI, the median urban household sees only a 3% increase in real income.