The substitution bias of the consumer price index

Abstract:\nThe paper uses elementary consumer theory to propose an inflation independent ratio definition of\nthe substitution bias of the Laspeyres consumer price index, and derives an approximate substitution\nbias which depends on the size of the price change as measured by a norm in the Laspeyres plane\nand on the elasticity of substitution in the direction of the price change. This norm or distance\nmeasure can be interpreted as a price substitution index which yields useful information about the\nmovements of relative prices. Norwegian CPI data are used to quantify these relationships.\nKeywords: consumer price index (CPI), substitution bias, elasticity of substitution