Purpose
– The purpose of this paper is to decompose inequality in Sri Lanka by population subgroups and income sources.

Design/methodology/approach
– The study is based on the latest Sri Lankan Household Income and Expenditure Survey. The study firstly sketches an inequality profile for Sri Lanka and then investigates the principle components of inequality by applying several decomposition techniques. Essentially a decomposable class of inequality measures were computed by considering households characteristics such as geographic location/sector, gender, education and type of employment. Inequality within and between population subgroups/sectors in the distribution of expenditure was done by employing the Theil's entropy index, mean logarithmic deviation, and the half the squared coefficient of variation. Concentration curves and indices were utilized to decompose inequality by expenditure components.

Findings
– The empirical findings are broadly encouraging. Decomposition analysis results reveal that in all groups used, the between-group inequality accounts only for a very small part of the overall inequality. Thus, reducing inequality between the household groups would have only limited effect on reducing the overall inequality. Results confirm the fact that inequality in Sri Lanka was driven by relatively higher levels of expenditure inequalities of those at the top of the expenditure distribution. Decomposition estimates of the Gini index by expenditure sources via Rao's method revealed that the distribution of non-food expenditure was more asymmetric as compared to food expenditure. Findings in general point to the wisdom of considering the redistribution of economic resources within-sectors and sub-groups rather than between-sectors and sub-groups if the intention is to cost effectively reduce overall inequalities in Sri Lanka. However, in practice an optimal-mix of within and between-group policies would be required in addressing overall inequality.

Originality/value
– This is the first study that analyzes the latest Sri Lankan Household Income and Expenditure Survey to decompose inequality by population subgroups and income sources.