Upper-Level Substitution and New-Goods Bias in the Korean Consumer Price Index

The present paper estimates upper-level substitution and new-goods bias in the Korean Consumer Price Index (CPI). It has been estimated that the upper-level substitution bias in the CPI alone increased the inflation rate by 0.51 percentage points per year over the thirteen-year period between 1990 and 2002. The new-goods bias further increased the inflation rate by 0.17 and 0.13 percentage points per year between 1990 1995 and 1995 2000 respectively. The new Chained Laspeyres index series that is based on annually-updated weights has been found to correct only less than half of the upper-level substitution bias.