The consumer price index (CPI)overstates the true inflation rate because it ignores changes in consumers' purchasing patterns as relative prices change.

Question

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The consumer price index (CPI) is calculated using a fixed basket of goods and services, and assumes that consumers’ spending patterns remain the same regardless of changes in prices. However, in reality, consumers may shift their spending towards cheaper alternatives as prices rise, which can mitigate the impact of overall inflation. Therefore, the CPI may overstate the true inflation rate by not accounting for these changes in purchasing patterns.

The Consumer Price Index (CPI)overstates the True Inflation Rate Because