The Economy & the Fed

Chain-Weighted Index and Substitution

A way of building a price index that updates what is in the basket as people change what they buy. When beef gets expensive and shoppers switch to chicken, a chain-weighted index like PCE counts more chicken; a fixed basket like CPI keeps pricing the same beef for a while. Because people move toward what has become relatively cheaper, a fixed basket overstates how much living costs rise. That overstatement is called substitution bias, and it is one reason the PCE price index usually runs a little below CPI.

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