Consumer Substitution, Cost of Living Indices and Exchange Rate in Argentina - First Part : 1960-1995

This paper reviews the theory of the true cost of living index and its approximation through superlative index numbers, as well as the Vartia quantum theory of bias in index numbers as applied to substitution bias in consumer price indices. Estimated adjustments are proposed for the Argentine Consumer Price Index on account of consumer substitution, for the period 1960-1995. Annual substitution is shown to be a relatively minor proportion of annual inflation, but to accumulate a sizable effect over the years. The absolute effect varies with the absolute size of annual inflation. Substitution bias in the CPI is shown to have a strong effect on estimates of the historical inflation record and the PPP exchange rates in the 1990s