What are some of the issues associated with the consumer price index?

What are some of the issues associated with the consumer price index?

What will be an ideal response?

ANSWER

The fixed market basket procedure creates a number of problems in the CPI over time. One problem is substitution bias. Consumers will demand various quantities of goods and services in response to changes in their relative prices. Thus, consumers are likely to adjust their purchases more quickly than what is reflected in the relative weights of the expenditure categories in the CPI. This outcome means that the CPI may not reflect the actual price increases faced by consumers over time. A second problem is that the CPI may not adjust adequately for changes in the quality of goods over time and fro the introduction of new goods. If the quality of goods in the market basket improves over time and their prices increase, the index may not recognize that the price increase actually resulted from an increase in the quality of the product.