Problems in measuring inflation

This study examines the measurement issues associated with the compilation of the Consumer Price Index (CPI) in Peru, particularly with regard to the substitution effect and changes in the quality of goods. It analyzes how the use of the Laspeyres index tends to overestimate inflation by failing to account for substitution among products due to changes in their relative prices, concluding that the substitution bias in the CPI between 1980 and 1994 was approximately 5% of the annual change. To quantify this bias, alternative indices such as those developed by Fisher and Törnqvist were used, revealing that regularly updating the reference basket could mitigate the bias. In addition, the study addresses changes in the quality of goods, noting that current methods such as direct comparison, while practical, lack robustness and can compromise the reliability of the indices. The implications suggest that periodic revision of the CPI is necessary to improve its accuracy, which is relevant for economic policymaking. (Abstract and audio: Department of Economic Publications)