A New Way of Tracking Inflation

Inflation is a crucial economic indicator in every country, closely monitored by governments, financial markets, and consumers around the world. Yet for nearly a century, the way prices are collected and measured has pretty much remained the same.

In the U.S. alone, hundreds of government workers go to retailers and businesses around the country to record prices for a list of goods and services. This is a costly and time-consuming task, which limits the number of items that can be monitored. With this method, inflation can only be measured on a monthly or even bi-monthly basis with official reports often coming out weeks after the data is actually collected.

To improve this process, we’ve created a way to collect prices daily and on a massive scale using the Internet. Called the Billion Prices Project, our Website publishes daily price indexes and provides real-time inflation estimates around the world.

Currently, we’re monitoring prices of more than 5 million items sold online by more than 300 retailers in 70 countries. We track prices in categories such as food and beverages, household products, electronics, apparel, and real estate, publishing data for countries including the U.S. as well as Argentina, Australia, Brazil, Chile, Colombia, France, Italy, Russia, Turkey, and Venezuela.

There are several advantages to our approach. For instance, we get the data much faster than traditional methods, updating our indexes in real-time. This means that we can start to detect changes in inflation trends weeks before they show up in official statistics. This is extremely important in our current economic times when everyone is concerned about inflation.

A good example of this was when our U.S. average online price index started to dramatically drop only two days after Lehman Brothers went bankrupt in September of 2008. We were then able to see prices recovering in early January 2009, well before a trend was picked up in CPI announcements.

In addition, using online data allows us to simultaneously monitor inflation in dozens of countries around the world. Government officials can use this type of information to detect things like political instability and humanitarian crises as well as react to the needs of their own citizens. When Chile suffered a massive earthquake last winter, we were able to track the prices of basic foods, water, and construction materials without any delays. We also can construct alternative indicators in countries where official statistics are often unreliable such as Argentina.

Another benefit of our method is that, for some categories of goods, we get much better coverage in terms of the quantity of items we can track. Just look at the traditional method in the U.S., which uses 80,000 prices to construct the CPI, compared to our Billion Prices Project, which monitors more than 500,000 prices.

While the Billion Prices Project provides an impressive amount of real-time data, it is still a work in progress. We are constantly expanding to include additional retailers and countries to our data collection, particularly in the developing world. We also are working to leverage the data to forecast future trends and conduct other valuable economic research. Our goal is to make it the most comprehensive source of inflation data available.

MIT Sloan Professors Alberto Cavallo and Roberto Rigobon are cofounders of the Billion Prices Project.

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