Consumer Price Index and Colas

There are several limitations of the CPI. Two sets of limitations of the CPI are discussed here: application and measure. The CPI may not be applicable to all population groups. Since it is designed to measure the experience of people living in urban areas, it may not accurately reflect the experience of people living in rural areas. Also, the CPI does not separately reflect the inflation faced by subgroups of the population, such as older persons, the poor, various ethnic groups, and males versus females. As noted earlier, the CPI measures only time-to-time changes in relative prices within an area. A higher index would not necessarily mean that prices are higher in one area compared with another area with a lower index value. The CPI cannot be used as a measure of the total change in living costs because social and environmental changes and changes in income taxes, which are beyond the scope of the CPI, are excluded.

Limitations on measure include sampling errors and nonsampling errors. Since the CPI is based on a sample of items, the index will differ from one based on all goods and services purchased in the United States. Nonsampling errors can be the result of problems in data collection, logistical lags in conducting surveys, difficulties in defining basic concepts and their operational implementation, and difficulties in handling the problems of quality change. Such errors can lead to persistent bias in the index.