substitution bias.
over time, some prices rise faster than others.
consumers substitute toward goods that become relatively cheaper, mitigating the effects of price increases.
the CPI misses this substitution because it uses a fixed basket of goods.
Thus, the CPI overstates increases in the cost of living.
introduction of new goods.
the introduction of goods increases variety, allows consumers to find products that more closely meet their needs.
in effect, dollars become more valuable.
the CPI misses this effect because it uses a fixed basket of goods.
thus, the CPI overstates increases in the cost of living.
unmeasured quality change.
improvements in the quality of goods in the basket increase the value of each dollar.
the BLS tries to account for quality changes but probably misses some, as quality is hard to measure.
thus, the CPI overstates increases in the cost of living.
each of these problem co