Real-time price data: The Billion Prices Project

The May 30 issue of the New Yorker has an interesting article by James Surowiecki about the difficulty in assessing the real state of the economy when indicators use data collected months earlier.

For instance in December 1930, Herbert Hoover (who had famously claimed that "the Depression is over" a few months earlier) put the number of unemployed Americans at 2 1/2 million when it wa in fact at 5 million. The reason for the discrepancy was that the available numbers when Hoover made his speech were 8 months old.

The Second World War "accelerated the trend toward quantifying things" (indeed, operations research became widely used during and right after the war to help the military improve its logistics), and it would be easy to believe that, in this day and age, our data collection process has become instantaneous and perfect - but it is not.

In fact, "the government continues to track inflation... much as it did in the 1950s"; in particular, it surveys consumers by phone, neglecting the ever-growing segment of people who do not have a landline. Most importantly, the Comsumer Price Index uses data that is a month old - better than in Hoover's days, but still too slow in fast-changing environments.

To address this issue, a team of M.I.T. economists has devised the Billion Prices Project, in which they track half a million prices daily (five times the number of prices that the government tracks) for goods sold over the Internet. This is, in essence, a real-time inflation index. You can read more about the B.P.P. on its project page and look at the chart comparing the B.P.P. with the government's Consumer Price Index over the past three years.

An important caveat is that services tend to be underrepresented among online goods. Surowiecki also points out that the availability of more accurate numbers does not mean politicians will use them.

Further reading:

• "The price is right", MIT News Office, January 2011.
• "Do we need Google to measure inflation?", Slate, December 2010.
• "A way, day by day, of gauging prices", Wall Street Journal, November 2010.

Comments

[Flinchbaugh]

I spend a couple of hours with the MIT economist who founded this program. It's already been used in some interesting ways. It's not perfect. In addition to the underrepresentation of services, some products have online list prices which are different once you get to the store, because discounting, bartering, trade-ins, and MSRP all create differences between Internet prices and real prices. However, this model once refined can really change how economists and governments use inflation data.

Jamie Flinchbaugh
Www.jamieflinchbaugh.com