Why might the stated inflation rate as measured in the United States overstate the true costs...

Why might the stated inflation rate as measured in the United States overstate the true costs of inflation?

Expert Solution

Answer - The CPI may tend to overstate the inflation because of the following reasons -

1 - The occurance of the substitution baises as a result of the rise in price of commodity in the basket of consumer. The expensive good is substituted by cheaper one but this is not clearly shown by CPI.

2 - CPI only reflects the increase in price , but it does not consider the improvements in the quality improvements of the products.

3 - When the new products are released , they are expensive , and recorded at that price by CPI. But gradually , as the market continues , these products become cheaper. But this fact is not recorded by CPI.

4 - The shift of consumer to new wholesale outlets for cheaper rates is not recorded by CPI as it records only a fixed market basket.

Because of these reasons , CPI in US tends to overstate inflation.

Rahul Sunny answered 2 years ago

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