Lullu Krugel, Masters, Quantitative & Economics Unit, KPMG, KPMG Crescent, 85 Empire Rd, Johannesburg, 2193, South Africa
Five sources of bias in the Consumer Price Index (CPI) have been identified: (1) Product substitution bias, (2) Outlet substitution bias, (3) Quality change bias, (4) New product bias, and (5) Aggregation bias. This research aims to estimate the size of product substitution bias in the South African CPI. I calculate alternative CPI inflation rates for South Africa by means of a Laspeyres, Paasche and Fisher index. I compared the Fisher index with the official CPI index for South Africa in order to estimate the size of product substitution bias in the South African CPI. The findings indicate that product substitution bias has lead to the official CPI overestimating the rate of CPI inflation by between 0.2 percentage points and 1.5 percentage points on average over various time periods and that product substitution bias seems to increase as more time passes from the previous update of the basket weights.