Disaggregating the economy: online prices

At the AEA session on measuring well-being, Austan Goolsbee and Pete Klenow write in an abstract,

We use transactions-level data from Adobe Analytics to analyze inflation online vs. offline. Online inflation from 2014-2017 period averaged about 100 basis points lower than inflation in the CPI for the same categories. Entry and exit of new product varieties is extremely important in most online categories (but less so in food and grocery). Data on quantities is particularly important because the entry and exit rates vary with product sales. The increased variety of products sold online implies an additional 100 basis points of lower inflation than in the matched model/CPI style indices.

In my view “the” inflation rate is an increasingly dubious concept. People can argue forever about whether true inflation is really much lower or much higher than what the CPI indicates.

Because we do not know the true inflation rate, we do not know the true real interest rate or the true growth rate of real wages. Not to mention the fact that there is no such thing as “the” wage rate, given the divergence in wage behavior across different categories of workers.

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5 Responses to Disaggregating the economy: online prices

  1. edgar says:

    Thank gods, the Dr. Kling we know and love has returned. Who kidnapped him and posted those wretched posts countenancing more aggregate this aggregate that mumbo jumbo?

  2. Dave says:

    Summing the entire economy into a few scalars is bound to be a fool’s errand.

    • Candide III says:

      We do sum entire volumes of gases and liquids, which contain astronomically large numbers of molecules, into a few thermodynamic variables (density, pressure, temperature) but the mathematics of this summation relies essentially on the hypothesis of molecular chaos, which says that the velocities of colliding molecules are uncorrelated and independent on position. Obviously a modern economy cannot be described this way; highly significant correlations are everywhere. There are advanced methods that can deal with such systems if correlations are approximately scale-invariant, but I for one wouldn’t know where to begin applying these methods to the economy.

  3. Richard Fulmer says:

    Imagine a world of free banking in which the market sets interest rates. Would we be able to determine the true inflation rate under those conditions? Would economists be better able to measure or determine other things?

  4. Patrick Barron says:

    Austrian School economics defines “inflation” as an increase in the money supply. Higher prices are…well…simply higher prices. It is foolish to regard a lack of higher prices in the face of an increase in the money supply as proving that increases in the money supply do not disrupt the structure of production and bring on an inevitable bust. This lesson was learned by the Austrians a long time ago. It explained why America went into a severe depression after great economic growth in the 1920’s in which prices remained relatively stable. Productivity increases masked the underlying malinvestment of capital caused by a steady increase in the money supply.

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