Inaccuracies Of The Consumer Price Index (cpi) :: essays research papers

Inaccuracies of the Consumer Price Index (CPI)     The Consumer Price Index is a measure of the prices of a fixed marketbasket of some ccc consumer goods and services purchased by a "typical" urbanconsumer. The 1982-1984 period serves as the base period so analysts can compareother years changes with this base period. The fundamental law of the marketbasket is fixed in the base period and is assumed not to change from one periodto another. The reason for the assumption is because the CPI measures the costliness of a constant standard of living. Critics claim that the CPI isinaccurate because it overstates the increases in the cost of living. For thisreason, the CPI has been said to be inaccurate.     First, consumers do change their spending patterns. yet though thecomposition off the market basket is assumed not to change, it does becauseconsumers change their spending patterns. Because consumers substitute lowerpriced products in l ieu of high priced ones, the system of weights has shifted. The CPIassumes that this does not occur and therefore it overcompensates the standardof living.     Secondly, because the base period was over a decade ago, the quality ofthe products has increased significantly, and therefore the prices should behigher. The CPI, however, assumes that the increases in prices is a result ofinflation rather than quality improvements which is false. Here also, the CPIoverstates the rate of inflation.     Many consumers do not mind the overcompensation of the CPI because in approximately cases it means more money in their pockets, but there are some consequences.This may cause an ongoing inflation trend. The reason why the disposal doesnot restrict it is because they are worried about getting re-elected. Even ifthe President does call for a revision of the CPI, Congress would defeat it tokeep their positions.     another(prenominal) consequence of the overstated CPI involves the adjustment of taxbrackets. Their intent of indexing is to prevent inflation to cause people to beplaced into a higher tax bracket. For example, if your income increases by 10%,that may put you in a higher level tax bracket, but if product prices have also