Page 66 - FINAL CFA SLIDES DECEMBER 2018 DAY 5
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Session Unit 4:
17. Understanding Business Cycles, p. 1
LOS 17.g: Compare inflation measures, including their uses and limitations, p.93
CPI is a Laspeyres index, which uses a constant basket of goods and services. This is
biased because:
New goods replacing old ones may be more expensive , hence biases index upwards.
Quality changes may account for the price, not inflation! Use hedonic pricing to fix this!
Substitution – as price of one increases, consumers may which to its close substitute but index
may still capture as fixed basket, hence biased!
Use Chained or chain-weighted price index e.g. Fisher index! A Geometric Mean of
Laspeyres index and/or A Paasche Index!
