Definition: Substitution bias

Category: Consumer Price Index

This is generally understood to be the bias that results when a basket index is used to estimate a cost of living index, because a basket index cannot take account of the effects on the cost of living of the substitutions made by consumers in response to changes in relative prices. In general, the earlier the period of which the basket is used, the greater the upward bias in the index. http://www.ilo.org/public/english/bureau/stat/guides/cpi/index.htm