Question

Many economists find the CPI an inaccurate measure of inflation (for example, see Forbes (Links to an external site.)Links to an external site.), however many political blogs argue that the CPI is just fine (see this one (Links to an external site.)Links to an external site.).

What incentives may be driving the differences? Are you more inclined to believe one perspective over the other?

Answer 1

CPI i.e. Consumer Price Index is an index that captures price changes of goods necessary for normal consumer basket. In CPI all the goods and services included are assigned some specific weight.

When it comes to its effectiveness of measuring inflation, the idea is that inflation can be measured from a consumer perspective with the help of CPI quite effectively. Because it is the consumer whose purchasing power is affected by inflation. Other measures of inflation can be WPI (Wholesale Price Index) in which price changes in wholesale goods and services are captured. The latter effectively measures inflation from the firm's perspective.

The incentive for differences is the idea of the perspective (firm or consumer). For society as a whole, both measures should be calculated separately and be used for inflation-related policy making.