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See Inside May 2011

Economists Find Faster, Cheaper Way to Measure Inflation



Editor's note: The article appears in print with the title, "The Prices Are Right".

Even in the information age, the U.S. Bureau of Labor Statistics still gathers much of its data the old-fashioned way. Workers make phone calls to find out what dentists charge for pulling teeth, and they visit stores to write down the prices of CDs and Russet potatoes. In the end, the data are accurate but take a month or so to compile and analyze.

To speed things up, Alberto Cavallo and Rigoberto Rigobon, economists at the Massachusetts Institute of Technology, created the Billion Prices Project (bpp.mit.edu). Software indexes Web sites to track prices of more than five million goods from 70-plus countries and spits out inflation rates in real time.

Although the Billion Prices Project is not intended to replace official statistics—it leaves out many service prices, like haircuts and dental visits, that aren’t readily accessible on the Internet—the quick data can come in handy during times of economic uncertainty. After the February 2010 Chilean earthquake, the government used Cavallo and Rigobon’s figures to monitor food prices and watch for any steep rises. Cavallo is now working on a way to apply the method to calculations of gross domestic product, the total value of all goods and services produced by a country. “GDP is what determines if a recession is imminent,” says economist Laurence Ball of Johns Hopkins University.

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