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.