CPI and Product Quality

Course: Fundamentals of Financial Planning
Lesson 2: Economic Concepts and Consumer Protection Laws

Student Question:

In this thought, it says that CPI only reflects price and does not account for quality of product. However, if the quality diminishes, then the amount needed to meet the same demand increases which then increases the supply needed to meet the same demand. Would this not affect the price?

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Instructor Response:

So yes, in theory, lower quality can lead to higher demand which can put upward pressure on prices.   However, that’s not always the case and is hard to effectively measure.

More importantly, CPI is only designed to track changes in prices consumers pay for a fixed basket of goods.  Nothing more, nothing less.  It does not adjust for changes in quality of products directly.  In other words, CPI tracks price per unit, not the quality purchased.

Does that clarify?