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 upperlevel substitution bias.