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    CPI and the effects of inflation

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    Does the Consumer Price Index (CPI) overstate the effects of inflation based off of the products that are now available that are higher in quality then those of a few years ago. Why or why not? Please include any examples or references used.

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    Solution Preview

    The answer to the question is yes.

    There are a couple of problems with the CPI that cause it to OVERSTATE inflation:
    1. The CPI does not allow for a substitution effect. For example, when the price of coffee increases, consumers will ...

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    The solution gives detailed discussion if Consumer Price Index (CPI) overstate the effects of inflation.