The problem with measuring inflation using the CPI is:
A) that inflation may be understated for people who buy mainly goods and services whose prices are stable.
B) that inflation may be overstated for people who buy mainly goods and services whose prices are rising faster than the average.
C) that the CPI has difficulty in accounting for changes in the prices of goods and services.
D) that the CPI uses a fixed basket of goods and services, and so cannot allow for people substituting towards cheaper goods and services.

Question

Quizplus · Accepted Answer

The CPI uses a fixed basket of goods and services, and so cannot allow for people substituting towards cheaper goods and services. This means that if the price of a good that is included in the CPI basket increases, but people start buying a similar but cheaper alternative, the CPI will not reflect this change in consumer behavior and may overstate the inflation rate.

The Problem with Measuring Inflation Using the CPI Is