CPI – Consumer Price Index

CPI biases

Substitution bias

When there in increase in prices of consumer good people consumer less and move towards buying other low price alternatives is called substitution bias.

Quality Change Bias

Quality of products is improved with the advancements of production methods, life of the product is more then the past. For example, If person bought an expensive dress and use it for 3 years cost per day is very low as compared to the dress he bought at lower prices( low quality) and used it for one year. There is no parameter in CPI to indicate the improvement in quality with the passage of time.

Outlet substitution bias

People used to buy product from normal shops, shopkeepers have to pay less rent for the shop but today people are shopping at wholesale shops, convenience shops,super markets etc. The shopkeepers have to pay high fixed and variable cost for the shops which also impact the prices of products. Consumers can easily purchase products in less time without any problem, CPI not includes the following benefits result in outlet substitution bias.

New product bias

Thousands of products are introduced in the consumer market each year but are not included in the CPI is called new product bias. For example, The price of cell phone decline and quality is improved as compared to 1990s and bring improvement to people lives but still the prices of cell phones are not included in the consumer price Index.