- CFA Exams
- CFA Level I Exam
- Topic 2. Economics
- Learning Module 11. Understanding Business Cycles
- Subject 7. Inflation
CFA Practice Question
In the U.S. the Consumer Price Index (CPI) is calculated using a ______ (fixed or different) basket of goods and will tend to ______ (overstate or understate) inflation.
Correct Answer: fixed; overstate
Since the CPI uses a fixed basket, it will not compensate for the fact that people will substitute away from goods with prices that are rising more rapidly than other prices. The result will be an overestimate of the inflation rate.
User Contributed Comments 4
| User | Comment |
|---|---|
| george2006 | people will substitute cheaper goods for more expensive one. So it has upward bias on actual inflaction. |
| viannie | Overstate inflation rate due to CPI biasness: 1) quality of goods 2) substitution of goods 3) retail outlet 4) new goods |
| johntan1979 | Outlet bias: Consumers switching to new outlets such as wholesale clubs or online retailers |
| ascruggs92 | To suggest that the US CPI index overstates inflation even from an academic standpoint is laughable |