Question

why consumer price index (CPI) overstates inflation when compared to inflation rate determined by using GDP deflator.

Answer 1

GDP deflator keeps quantities fixed at the "current year", whereas CPI keeps quantities fixed at the "base year". The simple answer is that CPI considers prices for a specific basket of consumer goods and services while the GDP deflator considers prices for all goods and services in an economy. In general, a change in the price of some good (included in the CPI basket) will have more of an impact in the CPI than in the GDP deflator because that good is proportionally larger in the CPI basket than it is in overall GDP.