Google Price Index Highlights Slowness of Economic Data Collection

Google is crawling the price data found in its shopping site to track inflation. The Google Price Index, which the company's chief economist Hal Varian discussed at a conference this weekend, would provide a lightning-quick alternative to the toilsome data gathering used in the standard Consumer Price Index.

There are certainly problems in the mix of goods that Google's Price Index captures. Google's data doesn't see housing or toilet paper, for example. But the Consumer Price Index is also far from perfect, particularly in reflecting changes in the basket of stuff that people are likely to purchase.

Way back in 1997, the Federal Reserve Bank of St. Louis pointed out the particular role that technology plays in mucking up the numbers. New tech introduces a "new product bias:"

This occurs when new goods and services are introduced into the economy but are not incorporated into the fixed market basket of the CPI until much later. For example, computers were not incorporated until 1987, and cellular phones will not be added until 1998. A further problem is that a large part of the price declines for many of these new goods occur over the early stages of the product cycle, when they have not yet been included in the CPI.

The CPI relies on yearly survey data from consumers to determine its basket of goods, so it takes a while for the basket to change.

Perhaps the strangest thing about economic numbers like the CPI, though, is that they are calculated on a monthly basis, lagging the real-time economy by weeks. Each month, an army of research assistants has to call up stores and record prices on 80,000 goods. They do it all manually.

Meanwhile, traders are sending money flying all over the world every millisecond of every day. That's a serious time-scale mismatch. It's not an ultimate answer, but at least the GPI brings data and action closer together.