Measuring price changes

Date posted: December 27, 2010

Because there are millions of prices in our economy, it seems that determining how much prices change would be a daunting task. The government has an official measure that is based on a sample of prices. Is there any confirmation of the government’s price changes from methods that are more comprehensive? N.C. State University economist Mike Walden answers.

“The big criticism of the federal government’s measure of price change i,s number one, it is based on a fixed market basket of things that you and I buy that is slow to change and it doesn’t include all prices. And so recently a couple of economics professors at MIT said, ‘You know what? Let’s use the internet. The internet now gives us access to literally millions if not billions of prices daily. Let’s start collecting those prices and calculate and index, calculate an average and see if it confirms or is different than the government’s official price changes.’

“And they have done this now for several months, and the good news is that their measure — which is, again, based on billions of prices — closely tracks the government’s consumer price index. Same pattern when the government’s index is going down — theirs is going down — and the same going up.

“The one difference is that the MIT research shows more variation in prices. For example, in 2009, when the government said prices were falling by 2 percent, the MIT study showed that prices were falling by 3 percent. And then recently the government has said that prices are rising an average of 1 percent; MIT says they are rising by 2 percent. But other than that, pretty close tracking.”

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