Suppose that the prices of dairy products have risen relatively less than prices in general over the last several years.To which problem in the construction of the CPI is this situation most relevant?

Question

Quizplus · Accepted Answer

This situation is most relevant to substitution bias because if prices of dairy products have risen less than prices in general, consumers may substitute away from other goods whose prices have risen more. The CPI may not fully capture this substitution effect, leading to an overestimation of the true inflation rate.

Suppose That the Prices of Dairy Products Have Risen Relatively