The consumer price index(CPI) measures the increase in the price of the marktet basket between the current year and the base year i.e. CPI is used to calculate inflation rate. Can inflation be oberstated by CPI?
CPI%26amp;inflation?
inflation is overstated by the CPI because it does not adjust for quality or the substitution effect.
CPI%26amp;inflation?
Inflation _CAN_ be overstated by CPI by selecting a basket of goods where the average price increase is higher than the increase in the money supply. However, in practice, CPI is reported by the government and the government knows that most people understand that inflation is bad. Therefore the incentive for government is everywhere and always to understate CPI. Unsurprisingly, if you chart CPI against M3 (which the government no longer wishes to report), guess which is higher?
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