Question

Say consumers buy two kinds of meat, beef and pork. If the price of pork doesn't change and the price of beef rises over time, then consumers will typically buy more pork and less beef. If the Bureau of Labor Statistics fails to capture such substitution between goods in the CPI calculation, then this will result in an

Answer 1

Answer:

This will lead to overestimation of CPI and inflation.

Explanation:

Suppose consumers buy two types of meat, beef, and pork. If the price of pork remains the same while the price of beef increases, the consumers will prefer the cheaper substitute. As a result, the demand for pork will increase and the demand for beef will decline.  

If the Bureau of Labor Statistics does not include this substitution in the CPI calculation, it will cause the CPI to increase as the price of beef is increasing. But in reality, consumer spending has not increased as they are purchasing more of the cheaper substitute.  

This will lead to the overestimation of both CPI as well as the inflation rate.