Economics Consumer Price Index Cpi Questions
The substitution bias in the Consumer Price Index (CPI) refers to the failure of the index to fully account for consumer behavior in response to changes in relative prices. It assumes that consumers do not change their consumption patterns in response to price changes, which may not accurately reflect reality. In reality, consumers tend to substitute goods and services with lower prices for those with higher prices, leading to a different consumption pattern. This bias can result in an overestimation of inflation because it does not fully capture the impact of consumer substitution.