The CPI somewhat overstates changes in the cost of living because it does not allow for substitutions that consumers might make in response to price changes.

Question

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When the price of a good increases, consumers may opt for a substitute good with a lower price, which would partially offset the impact of the price increase on their overall cost of living. The CPI does not account for these substitutions, which means that it may overstate the true increase in the cost of living.

The CPI Somewhat Overstates Changes in the Cost of Living