Sustitution Bias in the Consumer Price Index

Fernando Lefort

Journal Economía Chilena (The Chilean Economy), 1998, vol. 1, issue 1, 043-058

Abstract: The paper presents a revisión of different inflation measurement biases with emphasis on the so-called substitution bias. This bias arises because the usual indices (such as the Laspeyres index applied to the measurement of the CPI) assume absence of substitution between goods in response to price changes. This rigidity would cause an overestimation of the true cost incurred in attaining a constant utility level. Then the paper presents the first estimation of this bias for the case of Chile. The results indicates that this bias is approximately equal to an average 0.8 per cent per year during 1978-1989 and to an average 0.6 per cent per year during 1989-1997.

Date: 1998
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