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Is the CPI an appropriate measure of price level for calculating cost of living adjustments for...

Is the CPI an appropriate measure of price level for calculating cost of living adjustments for Social Security payments?

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Answer #1

CPI, consumer price index or inflation level is determined by comparing the price of fixed basket of goods and services with a base period. As the base period would be of some previous years, it fails to account for changes in people demand for goods with respect to prices, introduction of new goods and quality aspect related with the goods.

Hence CPI overstates the price levels which lead to higher payments towards social security payments.

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