James Surowiecki in this week’s New Yorker magazine wrote an interesting piece on the Billion Price Project which is a way of trying to get current figures in the calculation of economic varibles.
In order to track indicators such as inflation many economies haven’t changed the methodology that they use. For instance in the USA price data is gathered in much the same way as it was in the 1950’s – phone and business surveys, checking out prices in shops. The major issue is the fact that when the inflation figures are published they are already a month out of date and in times of volatility that is too late. Testament to this was in the 1930’s when Herbert Hoover anounced that “The Depression is over” as he said that only 2.5 million Americans were unemployed when in fact the figures were 8 months old. The true figure was 5 million with 100,000 more losing their jobs every week.
Two MIT economists have started a new venture called the Billion Prices Project (BPP) in which they gather price data through the Internet. It collects more than 500,000 prices daily which is 5 times the number that the government looks at. A good example of its usefulness is shown after Lehman Brothers went under in September 2008 – the project’s data showed that businesses started to cut prices almost immediately whilst the government statistics indicated this much later in November – see graph below. Also the BBP tends to keep governments honest as they have been notorious for manipulating inflation and jobless figures to their advantage – this is especially prevalent in developing countries. Currently the BBP suggest that inflation in the US is under control eventhough the government officials are concerned about a huge price spike and are therefore pushing to make interest rates higher which ultimately slows down the economy and forces up unemployment.