Does the CPI Overstate Inflation?
Many economists have concluded that the standard CPI modestly overstates inflation. To address problems in this area, the Bureau of Labor Statistics (BLS) made several changes in the official CPI over the last decade.[4] There is, however, one source of upward bias that the changes in the official CPI have not addressed — what is called “upper level substitution bias.” The standard CPI measures the cost of a fixed basket of goods and services; it does not reflect the savings that households obtain when they switch their purchases to closely related items that are becoming relatively less costly — for example, when families respond to an increase in beef prices by buying more chicken. Instead of making the significant conceptual change in the way the official CPI is calculated that would be needed to deal with upper level substitution bias, BLS instead has developed an alternative, “chained” CPI that removes this source of bias. The chained CPI rose by an average of 2.2 percent per year
