Can Big Data Help Measure Inflation?

Bourree Lam in The Atlantic: “…As more and more people are shopping online, calculating this index has gotten more difficult, because there haven’t been any great ways of recording prices from the sites disparate retailers.Data shared by retailers and compiled by the technology firm Adobe might help close this gap. The company is perhaps known best for its visual software,including Photoshop, but the company has also become a provider of software and analytics for online retailers. Adobe is now aggregating the sales data that flows through their software for its Digital Price Index (DPI) project, an initiative that’s meant to answer some of the questions that have been dogging researcher snow that e-commerce is such a big part of the economy.

The project, which tracks billions of online transactions and the prices of over a million products, was developed with the help of the economists Austan Goolsbee, the former chairman of Obama’s Council of Economic Advisors and a professor at the University of Chicago’s Booth School of Business, and Peter Klenow, a professor at Stanford University. “We’ve been excited to help them setup various measures of the digital economy, and of prices, and also to see what the Adobe data can teach us about some of the questions that everybody’s had about the CPI,” says Goolsbee. “People are asking questions like ‘How price sensitive is online commerce?’ ‘How much is it growing?’ ‘How substitutable is itf or non-electronic commerce?’ A lot issues you can address with this in a way that we haven’t really been able to do before.” These are some questions that the DPI has the potential to answer.

…While this new trove of data will certainly be helpful to economists and analysts looking at inflation, it surely won’t replace the CPI. Currently, the government sends out hundreds of BLS employees to stores around the country to collect price data. Online pricing is a small part of the BLS calculation, which is incorporated into its methodology as people increasingly report shopping from retailers online, but there’s a significant time lag. While it’s unlikely that the BLS would incorporate private sources of data into its inflation calculations, as e-commerce grows they might look to improve the way they include online prices.Still, economists are optimistic about the potential of Adobe’s DPI. “I don’t think we know the digital economy as well as we should,” says Klenow, “and this data can help us eventually nail that better.”…(More)