This paper considers urban–rural location and education as the main factors of expenditure inequality, and attempts to examine inequality changes associated with urbanization and educational expansion in Indonesia. The urban sector's higher educational group is found to have contributed significantly to overall inequality. Its within-group inequality increased significantly. This, together with educational expansion, led to a conspicuous rise in urban inequality. Overall inequality rose, due not only to the rise in urban inequality but also a widening urban–rural disparity, accompanied by urbanization. To mitigate overall inequality, the government needs to introduce policies that could reduce inequality among households with a tertiary education.