The Transformation of China's Consumption Structure and the Evolution of Welfare Gaps

How to effectively narrow welfare gaps among residents amid persistently large urban–rural and regional development disparities and income distribution gaps is an important issue for promoting common prosperity and high-quality development. This paper argues that inflation in China exhibits a structural feature characterized by trend changes in the relative prices of different categories of consumer goods, which have heterogeneous effects on the transformation of consumption structures across income groups. Inflation therefore has income redistribution effects and is an important factor affecting welfare gaps. The paper first estimates consumption preferences using the nonhomothetic constant elasticity of substitution and price-independent generalized linear expenditure systems, and then measures the evolution of residents' real income and welfare gaps using the Konüs index. The results show that the structural features of inflation in China since the reform and opening-up have driven the transformation of the consumption structure but slowed the growth of residents' welfare. This negative effect first increased and then decreased, reaching its maximum in 2016, when it was equivalent to a reduction of nearly 10 percentage points in residents' income. Inflation generates significant income redistribution effects, with relatively greater negative effects on the welfare of groups with lower consumption levels, causing real income inequality among residents to exceed nominal income inequality. In 2018, nearly two-thirds of residents experienced welfare losses greater than the social average. Since the 18th National Congress of the Communist Party of China, the income redistribution effects of inflation have gradually diminished; by 2018, the difference in welfare losses between residents at the 10th and 90th percentiles of expenditure had narrowed to approximately 3 percentage points. This paper proposes that optimizing the price structure to narrow differences in consumption structures across groups is an effective policy lever for mitigating the redistributive effects of inflation and narrowing welfare gaps among residents.