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What are some reasons that CPI inflation may overstate the true increase in the cost of living? D OO - Paragraph BIU A un E 1
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Answer #1

•If the quality of the good increases from one year to the next, the dollar's value increases, even if the price of the good stays the same.
•If the quality of the good falls from one year to the next, the dollar's value falls, even if the price of the good remains equal.
• The BLS attempts to adjust the price to constant quality, but such differences are difficult to measure.
• Replacement bias, introduction of new goods and unmatched changes in quality lead the CPI to overestimate the true cost of living.

• The issue is important since many government programs use the CPI to compensate for adjustments in the overall price level.
• The CPI exaggerates inflation by about 1 percentage point per annum.

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