Between 2008 and 2019, the proportion of regular online shoppers doubled in the EU, and COVID-19 further increased the frequency of online purchases. The prices available online are thus becoming more and more important and they are representative of the inflation perceived by the population.
Original blog post (Hungarian) available at: Economania
A significant part of the tasks of economist researchers and analysts is often to search for data collected by others. With the help of data, we get to know the world and can draw correct conclusions about the state of the economy. Today’s modern data collection methods (“Big Data”) thus represent a significant contribution to the expansion of our knowledge about the economy.
There are several advantages of monitoring prices online compared to the classic methodology. The most obvious is that it is cheaper and faster. The traditional way of measuring inflation, on the other hand, is to have a large number of skilled workers visit hundreds of stores and record the prices of products in a predetermined basket every month.
Observing prices online is much simpler than that. With the help of different “scraping” software, we can monitor the evolution of prices on thousands of websites even without in-depth knowledge of IT. With a simple laptop and wired internet, we can visit up to 100,000 pages per hour and collect the prices in a structured format. We must not forget the time spent on data cleaning, but there is a difference in magnitude between the costs of online and offline measurement. There is no serious cost to download the prices every day and see their changes with almost no delay. This is crucial for both academic researchers and policymakers.
Moreover, the benefits mentioned so far have increased in value many times over during the pandemic. Curfews prevented manual price monitoring, and online estimates preceded the official data release by 30 days (Jaworski, 2021).
The possibility of monitoring from a distance has already been extremely useful. Argentina’s official inflation statistics were heavily criticized between 2007 and 2015, but local economists were prevented from collecting the data independently. The Argentine government reported average inflation of 8 percent between 2007 and 2011, while online price increases suggest that it was actually around 20 percent. The online and official value, on the other hand, was the same for the other Latin American countries (Cavallo, 2013). Data falsification has also become a serious political issue in Argentina.
Another advantage of online data collection is that it can be done with the same methodology for all countries and the price level of the same products can be analyzed for different countries (similar to the famous Big Mac index). This represents a huge opportunity to analyze the topic of purchasing power parity (Cavallo, 2016).
Of course, there is a reason that online measurement has not yet replaced traditional inflation calculation. It is not possible, or very difficult, to observe all areas of the economy online. Many services and the price of housing (Cavallo, 2022), for example, cannot be obtained in this way. It is also important to compile our estimate based on a sufficiently large and representative sample of observed traders, as their heterogeneity can also significantly distort (Cavallo, 2017). For example, the pioneering project of online measurement, the Billion Prices Project, can cover a total of 60-70 percent of the consumer basket per country (Cavallo, 2016). In this area, COVID-19 brought progress, as the advertisement of many services became available online (Cavallo, 2022). Another disadvantage of monitoring on the Internet is that we do not have information on the quantities sold, so the weights calculated by the statistical offices are still needed to weigh the products.
Can the index produced in this way be used to estimate the consumer price index? In a large-scale project, Cavallo (2017) empirically investigated whether inflation measured online leads to significantly different results than inflation measured offline. To do this, he simultaneously monitored the pricing of commercial stores that sell both online and offline. All this by using a phone application to take pictures of the prices available in the store (10-50 products) and send them for analysis, while the online websites of the stores were monitored daily using the “scraping” method.
When comparing a given product in a given store, the online and offline prices were the same in 72 percent of the cases, although this varied by country and sector (the degree of agreement was greatest in the case of clothing and electronic devices).
The size and extent of the price changes measured online and offline do not statistically differ significantly from each other, but they do not move completely together over time. Online prices react more quickly to shocks, so they can even be a good predictor of inflation trends.
The relevance of the cited research is constantly increasing due to the increase in the proportion of online purchases. From 2008 to 2019, the proportion of regular online shoppers doubled in the EU, and COVID-19 further increased the frequency of online shopping. The prices available online are thus becoming more and more important and representative of the inflation perceived by the population.
Monitoring prices online is only one possible use of modern Big Data tools. These technologies allow economists not to consider the data as “given”, but to be able to produce and immediately analyze databases suitable for research.
References
Cavallo, A. (2013). “Online and official price indexes: Measuring Argentina’s inflation”. In: Journal of Monetary Economics 60.2, pp. 152–165. ISSN: 03043932. DOI: 10.1016/j.jmoneco.2012.10.002. URL: https://linkinghub.elsevier.com/retrieve/pii/S0304393212000967.
— (2017). “Are Online and Offline Prices Similar? Evidence from Large Multi-Channel Retailers”. In: American Economic Review 107.1, pp. 283–303. ISSN: 0002-8282. DOI: 10.1257/aer.20160542.
— (2022). “Big Data, Covid inflation and Stockouts”. Big Data and New Tools to Track infaltion in Real-Time.
Cavallo, A. and R. Rigobon (2016). “The Billion Prices Project: Using Online Prices for Measurement and Research”. In: Journal of Economic Perspectives 30.2, pp. 151–178. ISSN: 0895-3309. DOI: 10.1257/jep.30.2.151. URL: https://pubs.aeaweb.org/doi/10.1257/jep.30.2.151.
Jaworski, K. (2021). “Measuring food inflation during the COVID-19 pandemic in real time using online data: a case study of Poland”. In: British Food Journal.