•The issue is important because many government programs use the CPI to adjust for changes in the overall level of prices. The most commonly cited measure of inflation in the United States is the Consumer Price Index (CPI).The CPI is calculated by government statisticians at the U.S. Bureau of Labor Statistics based on the prices in a fixed basket of goods and services that represents the purchases of the average family of four. The following points highlight the three Measurements for Cost of Living. So if the CPI for the whole nation increases 1%, that might not result in a higher cost of living in places like Wyoming, because their prices might have stayed the same. Producer Price Index (PPI). 3 . The Measurements are: 1. Consumer Price Index (CPI) 2. "Does the CPI overstate increases in the cost of living?," Southwest Economy, Federal Reserve Bank of Dallas, issue Sep, pages 5-9. The resulting study, titled "Toward A More Accurate Measure Of The Cost Of Living" (but often referred to as the Boskin Report), summarized the viewpoint that the CPI was upwardly biased. How Changes in the Cost of Living are Measured. •The CPI overstates inflation by about 1 percentage point per year. PCE price index is more accurate. According to a recent study by Fed economists, the CPI likely overstates inflation by about 0.9 percentage points, Bernanke wrote. The BLS has made technical adjustments, but the CPI probably still overstates inflation by about 0.5 percent per year. ... the Laspeyres index tends to overstate the increase in the cost of living because it ignores the fact that consumers have the opportunity to substitute cheaper goods for expensive ones. The most commonly used index, the Consumer Price Index (CPI), published by the Bureau of Labor Statistics (BLS), estimates that inflation has reduced a dollar’s value by 71% from 1979 to 2018. That means they may swap beef for chicken to save money. Also, the CPI doesn't take into account increases in consumers own wages. quality changes cause the CPI to overstate the true cost of living. Mark A. Wynne, 1995. The Importance Of How the CPI Is Figured Is Massive Consumer inflation has been estimated since the 1700s by measuring price changes in a fixed-weight basket of goods. The CPI is just the average price of goods. Each of these problems causes the CPI to overstate cost of living increases. Consumer Price Index: Measuring the Cost of Living and Inflation ... so that's why it tends to overstate inflation. Put another way, one 2018 dollar is worth 29 1979 cents. The CPI may overstate how quickly the average cost of living is increasing for Canadians. Here are some reasons why: Substitution: People change their buying habits when prices go up or down. 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