CFA Practice Question

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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
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