When consumers substitute to avoid rising prices, the official CPI increases more slowly.

Question

Quizplus · Accepted Answer

The official Consumer Price Index (CPI) measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. When consumers substitute to avoid rising prices, the CPI may not fully capture this behavior, as it is based on a fixed basket of goods and services. However, the CPI-U (CPI for All Urban Consumers) does incorporate some substitution effects through its use of a geometric mean formula since 1999, but this adjustment may not fully account for all consumer substitution behaviors, potentially leading to an overestimation of the true cost of living increases rather than causing the CPI to increase more slowly.

When Consumers Substitute to Avoid Rising Prices, the Official CPI