Official price indexes may overstate (or understate) inflation for a number of reasons. These include substitution bias, outlet bias, failure to allow properly for quality change, and failure to allow for new goods. This note finds that substitution and outlet bias are probably not significant sources of error in the UK. The other two sources most probably do lead to significant overstatement, but the size of the upward bias cannot at the moment be quantified.
‘Since, with technological advance, the quality of products tends to improve, the estimates of consumers' expenditure tend to understate the true growth in standards of consumption’. (CSO a 985, p. 72).
‘The Producer Price Indices … make some allowance for changes in models and specifications when these can be identified in terms of changes of cost or in technical performance…. [Allowances for quality change] are necessarily somewhat rough and seldom fully satisfactory’. (CSO 1985, p. 40, emphasis added).