A 'theoretical fixed basket' doesn't reflect what people buy

The argument

This argument holds that the standard way of measuring inflation overstates it, because it tracks a basket of goods that consumers do not in fact keep buying as prices change. The behaviour at issue is substitution. Rising prices lead to people substituting certain more expensive goods with cheaper ones: when the price of steak rises, households will often buy more chicken and fish instead. The household is not necessarily worse off by the full amount of the steak price rise, because it has moved to a substitute it finds acceptable. Economists refer to this as a substitution effect, and the consequence for measurement is direct — the basket that consumers actually purchase is generally lower than a theoretical fixed basket which assumes they go on buying the same quantities of the same items. The measurement error therefore has a predictable direction. A fixed basket prices a pattern of consumption that consumers have already adjusted away from in response to the price change, so it records the full increase on the expensive good while ignoring the cheaper choice the household in fact made. What is reported as a rise in the cost of living is partly a rise in the cost of a basket nobody is buying. The argument acknowledges that the problem has been partly addressed. The Consumer Price Index in the late 1990s started incorporating the substitution effect using geometric weighting, which allows the measure to reflect some of the shifting between goods. But proponents hold that the correction is incomplete, and that the index still displays the tendency for inflation to lean towards being overstated. Because the fixed-basket method attributes to consumers a pattern of spending they move away from, the argument concludes that inflation is overstated rather than understated.

Premises

Counter-arguments

The argument describes a bias that statistical agencies identified and corrected, then asserts it survives without saying why. Its own text concedes that substitution was incorporated through geometric weighting in the late 1990s, and further changes followed — rotating outlet and item samples, hedonic adjustment for quality change, and chained indices that update weights continuously rather than holding a basket fixed. The fixed-basket criticism therefore describes a superseded methodology, and the conclusion that the tendency "still" persists is stated rather than argued. Substitution also cuts both ways. If a household switches from steak to chicken because steak has become dearer, its spending is lower but so is what it consumes; treating the substituted basket as equivalent assumes the cheaper good delivers the same satisfaction, which is exactly what is in dispute. The switch is a response to a price rise, and a measure that nets it out records a smaller increase than the household actually experienced — on which reading substitution adjustment makes the index understate, the second sibling position's claim. The argument finally names one direction of measurement error while several run the other way: new goods enter indices with a lag, quality adjustment is contested in both directions, and outlet substitution and package downsizing are imperfectly captured. Reviews of the evidence have generally found residual bias small and its sign uncertain, which supports the third sibling position that the measure is broadly accurate.

Rejecting the premises

[Rejecting P1] Substitution is real, but the premise concedes the correction: geometric weighting was introduced in the late 1990s, and chained indices, rotating samples and quality adjustment followed, so the fixed-basket criticism describes a superseded methodology. [Rejecting P2] Netting out substitution assumes the cheaper good delivers equivalent satisfaction, which is what is disputed, since a household switching in response to a price rise is worse off — so the adjustment can make the index understate, while reviews of measurement error find residual bias small and of uncertain sign.