To track inflation, each month the Bureau of Labor Statistics canvasses businesses and records the price of, say, a 4.4-pound bag of golden delicious apples, among hundreds of other items. The agency dials land lines to survey how consumers spend their money. It's essentially the same process the BLS has used for half a century. In a recent budget request, the agency admitted its methods are "increasingly out of touch" in the age of cell phones and e-commerce.
Alberto Cavallo's Billion Prices Project may be a way to bring that process into the 21st century. Each day, software developed by Cavallo, a 33-year-old economist at Massachusetts Institute of Technology, scours the websites of roughly 300 online retailers and records the prices of some 5 million goods sold on the Web. "The technology is very similar to what Google uses to index Web pages," says Cavallo. The software, which Cavallo and his colleague Roberto Rigobon have fine-tuned over the past three years, spits out a daily estimate of price changes.
The BPP's focus on delivering real-time data "is paramount for businesspeople and policy makers," says James Hamilton, an economist at the University of California at San Diego. A week after Lehman Brothers collapsed in 2008, the BPP registered falling prices across the U.S. The BLS's official measure of inflation, the consumer price index, didn't report deflationary numbers until 56 days later. Cavallo says the BPP is currently running higher than official inflation estimates, and expects the latter to catch up soon. "I don't consider it an alarming trend," he says, "but it's worth watching closely."
A limitation to the BPP, says Hamilton, is that "not everything is traded on the Internet." Certain transactions, including real estate sales and services like medical care, still take place mostly offline. Yet Hal Varian, Google's (GOOG) chief economist, notes that one of the key benefits of the project may be that "it isn't filtered through a statistical agency which, for some countries, cannot be entirely trusted." Indeed, Cavallo, who spent much of his childhood in Buenos Aires, began an Argentina-only precursor to the BPP in 2007 because, he says, government officials had "started manipulating their inflation statistics." In such cases, he says, the BPP can serve as a private-sector check on officialdom.
Cavallo is a second-generation economist. His father, Domingo Cavallo, headed Argentina's Finance Ministry during the 1990s, and helped engineer the policies that cured the country of hyperinflation. The younger Cavallo emigrated in 2003 and got an economics PhD at Harvard. He views the BPP as a public resource—he has no plans to make money on it—and has made presentations to government officials about how it can complement their efforts. "The next challenge is to understand how governments can use this information to make better decisions," he says.
MIT economist; father helped cure Argentina of hyperinflation
Tracks prices with software "similar to what Google uses"
Complement to official stats that could keep governments honest