get out my face

The article also sheds light on the flaws of using CPI solely to measure inflation. For instance, CPI measures prices of products across the board under the assumption that consumers buy the same amount of each product every month. Ice cream for example might become more popular in the summer months when the weather is nicer, thus increasing the demand for ice-cream and creating some inconsistency in quantity of ice-cream purchased throughout the year.  Of course due to substitution bias, as the price of say bacon rises the next month, consumers might decide to switch to vegan bacon, the cheaper alternative. Therefore, the price of bacon that consumers actually buy will rise less than the recorded CPI amount. Of course CPI also does not take into the account the increase in quality in addition. In the past few years there has been a push for grass fed cow meat and dairy products as well as free range animal products. These products are significantly more expensive since it costs more to feed cows grass over grain or to let pigs roam free rather than to keep them systematically housed. Therefore, the cost of meat and dairy products in particular have undergone drastic increase in prices not just due to inflation but also largely due to increase in quality. Because there are always flaws such as these in using CPI to calculate inflation, it is necessary to take into account other methods such as PPI which measures change in price from the producer side.

However the Consumer Price Index is still one of the most well recognized and utilized pieces of data since the general movement in price among thousands of good and services is extremely important to not regardless if inflation is truly the main factor at play or not. Consumer price index is widely referred to by economists around the world as well as policy makers whom make impactful decisions based on the data.

 

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