Question

1111 OULUN 2 HUIS d) Explain why the change in CPI doesn't necessarily reflect the change in prices of necessities and who this is likely to impact upon the most. (3 marks)

Answer 1

CPI is one of the most fundamental and important economic indicator.CPI is followed all over the worl relentlessly but the index is far from perfect as the measure of either inflation or the cost of living. CPI is a weighted index of goods purchased by the consumers.CPI may constitute a relatively good measure of price changes in specific goods purchased in its basket one limitation of the CPI is that the consumer goods it considers do not provide a sampling that represents all production or consumptions in the economy. Another problem with the index is that the index doesnt factor in sustitution. the economic reality is that when certain goods significantly more expensive, many consumers find less expensive alternatives to them, unable to take into account the cpi instead presents numbers assuming consumers are continuing to buy the same amount of increasingly expensive goods.cpi also doesnt provide accurate measure of buying habits of the rural area people. cpi doesnt provide seperate reports accoring to different demographic groups.

better measure may be Personal Consumption Expenditure Price Index(PCE)