During a period where inflation is driven primarily by sharp increases in the prices of household energy and basic groceries, the official Consumer Prices Index (CPI) trend may understate the true increase in the cost of living for low-income households.
Which of the following best explains why this understatement occurs?
Low-income households spend a higher proportion of their income on essential goods than the average household weights used in the CPI basket.
The CPI uses a geometric mean which automatically over-corrects for price rises in inelastic goods.
Low-income households have a higher marginal propensity to consume, meaning they experience faster price rises across all goods.
The CPI basket excludes housing-related energy costs, meaning utility price rises are completely omitted from the trend.
