Question

What are the limitations on what the Consumer Price Index can tell us ?

Answer 1

Consumer Price Index as a measure for inflation and cost of living , has got some inherent flaws . CPI is calculated on a fixed basket of goods and services . So basically it does not include all the produced goods in the economy . This is the most important limitation . CPI does not tell us about substitution . Substitution an expensive goods for cheaper alternatives is a common practise in the economy , but CPI does not capture this substituion effect . New products when introduced in the market does not immediately become part of CPI even if a section of consumers has high demand for the product .