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 merchandisebasket of some 300 consumer goods and services purchased by a "typical" urbanconsumer. The 1982-1984 flowing serves as the base period so analysts can compareother years changes with this base period. The composition of the marketbasket is fixed in the base period and is untrue non to change from one periodto another. The reason for the assumption is be author the CPI measures the preciousness of a constant meter 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 outlay patterns. Even though thecomposition off the market basket is assumed not to change, it does becauseconsumers change their spending patterns. Because consumers substitute lowerpriced products in spatial relation of higher(prenominal) priced ones, the weight 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 change magnitude significantly, and therefore the prices should behigher. The CPI, however, assumes that the increases in prices is a result ofinflation quite a than quality improvements which is false. Here alike, the CPIoverstates the rate of inflation.     Many consumers do not mind the overcompensation of the CPI because inmost cases it means more money in their pockets, but there are some minutes.This may cause an ongoing inflation trend. The reason why the government doesnot secure it is because they are worried about getting re-elected. Even ifthe President does title for a revision of the CPI, Congress would defeat it tokeep their positions.      Another consequence of the overstated CPI involves the adjustment of taxbrackets. Their intent of indexing is to hold back 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