Possible reasons for it to be inaccurate:
1) New products and technology- tendency to lag the advantage of a new technology. By the time they start incorporation the price it is already cheaper, but they use the higher price. This can cause a problem.
2) Quality of products changes- You may be getting more for your money. This can be a negative thing to because you could end up paying for things you do not need or want. Ex) Calculator- do you need everything on it, do you know how to use everything on it.
3) Growth in discounting - doesn’t take into consideration things sold at discount prices, it instead indexes them as lower quality goods instead of discounted items.
4) Nonmarket goods- ex) housing markets- rent if renting is better price, buy if buying is better.
5) Substitution effect -
The idea that as prices rise (or incomes decrease) consumers will replace more expensive items with less costly alternatives. Conversely, as the wealth of individuals increases, the opposite tends to be true, as lower-priced or inferior commodities are eschewed for more expensive, higher-quality goods and services - this is known as the income effect.
Although beneficial to some (i.e. discount retailers), in general, the substitution effect is very negative in nature, as it limits choice. This is true not only for products, but also for services. Examples of the substitution effect in action can sometimes be observed over the winter holiday season, where, in lean economic times, discount retailers often hold up well.
GDP Deflector -uses appropriate indexes for all prices in the economy.
-*Government wants 2% inflation*
Producers' Price Index (PPI):
-Prices in nonretail markets