The Consumer Price Index is a measure of the change in prices consumers pay for different goods over time. This index is often used as a benchmark for inflation. However, the inflation levels the Consumer Price Index suggests are not without controversy. Often inflation is accused of being overstated or understated. So what is the truth? And why would it be either?
No, inflation is overstated
Various biases cause inflation to be continually overstated.
A 'theoretical fixed basket' doesn't reflect what people buy
When prices rise, consumers buy cheaper goods rather than higher priced goods.
Inflation is accurate, but ignores varying demand elasticity among its components
The fastest-inflating components of CPI are demand inelastic. You can delay or decline a TV purchase, but not a hospital stay. Demand-inelastic items therefore consume an ever larger proportion of the consumer budget. This is most noticeable to lower-income consumers, who perceive a creeping loss of financial control, even if their total spending is growing only slowly.
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This page was last edited on Wednesday, 12 Aug 2020 at 14:03 UTC
