Substitution bias

Not to be confused with Substitution bias (psychology).

Substitution bias describes a bias in economics index numbers arising from tendency to purchase inexpensive substitutes for expensive items when prices change.

Substitution bias occurs when two or more items experience a change of price relative to each other. Consumers will consume more of the now comparatively inexpensive good and less of the now relatively more expensive good. This influences the CPI basket. For example, a selected good is bought by consumers and it is therefore included in the CPI basket, but when an increase in price of that selected good occurs customers may buy a cheaper substitute, while the CPI basket does not change. If product A is purchased by most consumers, and product B has a sale making it cheaper, consumers will naturally buy what is cheaper.

Substitution Bias is an inaccurate measure and cannot correctly measure CPI.

Because of its effect on consumption, substitution bias can cause inflation to be over-estimated.

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