Final answer:
True, the CPI is limited in its ability to account for new innovations, as the fixed basket of goods and services is slow to include new products, missing their initial higher costs and subsequent price declines.
Step-by-step explanation:
The statement that CPI is severely limited in its ability to account for new innovations is true. The Consumer Price Index (CPI) utilizes a basket of goods and services to track and measure price changes over time. Since the basket is based on past consumption patterns, it does not immediately include new products that consumers begin to buy. This inevitable lag, which can span several years, means that the CPI doesn't promptly incorporate the quality/new goods bias brought by innovations. For example, it took until 1964 for air conditioners and until 1987 for VCRs and personal computers to enter the CPI basket, even though these products were widely available and sold much earlier. Technology continues to evolve, and as innovations like cell phones have shown - which had over 40 million subscribers by 1996 yet were not in the CPI basket - the CPI struggles to keep up.
By not promptly accounting for new products, the CPI can miss the initial higher costs when they are newly introduced and their subsequent price decline, which potentially leads to overstating the true rise in the cost of living. When online shopping and changing consumer habits are considered, it's evident that the CPI's ability to reflect the accurate cost of living in the presence of innovation is limited.