CONSUMER PRICE INDEX

Consumer Price Index
Name
Institution

Perfect Indexing is Not Possible
Presently, CPI is perceived to be a vital economic indicator because regular price averages influence the financial markets, not to mention payments for social security and other programs that are funded by the government. With this in mind, a CPI that is too high or low can wreak havoc on investment. Despite that, the multiple weaknesses that the model contains make it an insufficient economic indicator.
Firstly, CPI considers products that are frequently consumed by citizens. However, given that the goods regarded as the primary constituents of the basket are not necessarily a perfect illumination of production and consumption in the country, CPI is a flawed barometer of people’s expenditure changes.
Secondly, when choosing goods to be included the basket, there is no emphasis on the consumer substitution (Baker, 2016). However, in most cases, when products become too expensive, most consumers opt for cheaper alternatives. That said, the numbers presented by CPI suggest that consumers continue to purchase the goods whose prices are escalating continuously, which is an erroneous assumption.
Thirdly, invention and innovation lead to an introduction of new products in the market that consumers buy frequently. Fundamentally, it takes time for the new goods to become components of the basket, despite that they are highly purchased and account for a significant proportion of expenditures of consumers. Thus, the lack of inclusion of the new commodities is a considerable weakness of CPI.

Fourthly, the construction of the CPI reflects on the changes in prices in urban centres but fails to report about the same in the rural areas. Such failure to provide separate reports based on demography is, therefore, a significant weakness of CPI. Lastly, when calculating CPI, there is no factoring in of changes in the quality of the goods, yet the price of the products might be as a result of improvement in the quality which benefits the customers. Hence, lack of a value-measuring standard makes the index unappreciative of the value improvements that are beneficial to customers
References
Baker, D. (2016). Getting it Right: Debate over the Consumer Price Index. Routledge.