Suppose hypothetically that you buy a lot of food such as tofu, veggie burgers, and organic fruit that are not included in the market basket used to compute the CPI. In addition, suppose that all of these goods have become cheaper over the last year, while the overall CPI has increased by 6 percent. Then which of the following is true?

a. The CPI will understate the negative impact of inflation on your purchiasing power and standard of living

b. The CPI will still accurately state the negative impact of intlation n your purcliasing power and standard of living.

c. The CPI will overstate the uegative inpact of inflation on your purchusing per and standard of living

d. Inflation has a larger effect on your standard of living than on the averige comuner

C) The CPI will overstate the negative impact of inflation on your purchasing per and standard of living

Explanation:

This is something common with the consumer price index (CPI) since they use a common/average/normal basket of goods to calculate the inflation rate. But what happens when you do not purchase common or normal goods. For example, the CPI assigns a large value to transportation costs, but what if you work at home, and you only go out once a week. Then all those transportation related expenses do not affect you.

In this case, since you buy uncommon food, not included in the CPI basket, the inflation rate that applies to other common foods does not apply to you. So actually, the CPI is overstating the inflation rate, since your personal inflation rate is much lower.

The problem with calculating a more exact CPI is that you cannot account for everyone's purchases, imagine the billions of transaction that should be recorded. It's totally impractical.