According to an inequality decomposition analysis by urban and rural sectors in Indonesia, urban inequality’s contribution to overall inequality in per capita household expenditure has been increasing steadily with widening urban inequality and urbanization proceeding following globalization and financial/trade liber alization. According to the Theil T index, the contribution rose from 54% to 63% during the 1996-2002 period. Urban inequality is expected to play a more important role in overall inequality. This paper explores the determinants of urban inequality in Indonesia using monthly household consumption expenditure data for 1999, 2002, and 2005 from the National Socio-Economic Survey (Susenas). It focuses on educational differences as the major determinant, since according to previous studies in Asian countries they account for around 20-40% of overall inequality.