Most economists believe that substitution behavior by consumers causes inflation measured by the Consumer Price Index (CPI)to overstate the true rate of inflation.

Question

Quizplus · Accepted Answer

When prices of certain goods or services rise, consumers tend to substitute those with other relatively cheaper alternatives. Thus, the CPI tends to overstate inflation as it does not account for this substitution effect. Economists refer to this phenomenon as the "substitution bias" of the CPI.

Most Economists Believe That Substitution Behavior by Consumers Causes Inflation