Inflation is often measured by evaluating chances in the cost of a fixed basket of goods and services. This method overestimates inflation because it does not account for changes in spending patterns that result from relative price changes
Explanation:
Most analysts agree that inflation indexes continue to overestimate the actual rise in living costs. This means that analysts assume the real cost of living has generally risen by less than 3% while the inflation rate is reported as 3%.
It means inflation overestimates the real rise in living prices because the customer is not better off when the new goods are launched.
Example: Assume whether you have $100,000 to invest on the Amazon marketplace of 2015 or the genuinely low cost Sears Collection, 1963. How are you going to pick? In 1963 costs were much smaller, and you could buy a lot of things, but you'd not like a lot of low quality products. So even if the collection for 2015 is so much more expensive, a greater consistency compensates for part of this issue.
