Why does it matter if the CPI overstates or understates the inflation rate?

Answer 1

Many people's pensions are linked to the CPI, and it is also generally used as a guide for negotiating pay raises [in the long run, people's raises need to *EXCEED* the 'true CPI', or else their financial situation never improves or indeed, gets worse].

And so when the government 'fudges' the numbers [like in the U.S., where food and energy, (the most basic cost-of-living prices) were recently excluded from the measure] and people don't realize that the number has been fudged, they will tend to lose buying power each year, because their raises in pay/pension won't be keeping up to the *ACTUAL* increase in the cost of living. :)