Another Price Index, Brought to You by Google

For most, the world of inflation statistics can be mind-numbing.  Economists have developed a variety of indices. And there are three different ones that the federal government uses or could use:  the CPI-U, the CPI-W, and the chained CPI-U.

Well, now there may be a fourth: the Google Price Index (GPI).  The GPI will measure the cost of goods sold on the Internet, so it will not be a strict replacement for the other CPIs. It may, however, be more timely than official statistics. Google's chief economist, Hal Varian, remarked that the GPI could update its estimates during any given month, as opposed to the U.S. Labor Department, which waits until a month ends to estimate changes in the CPI.

So what does the GPI tell us? For one, it shows the changing nature of price indices. As economists and others find new ways to better account for changes in price levels, the price indices must change or new ones be created.  We see this with the three traditional CPIs: the CPI-U was created as an alternative to the original CPI-W, and the chained CPI-U is intended as an improvement upon the CPI-U (read in more detail about the indexing alternatives in CBO's report here).

Currently, many areas in the budget are indexed to measures of inflation that are believed to overstate the degree to which consumers are affected by inflation, since they ignore the full amount of substitution that occurs when prices go up. Switching to the newer “chained CPI” would generate savings on both the tax and spending side of the budget.

Making the switch could save the government a few hundred billion dollars over the next ten years while still adjusting programs to reflect price growth in the economy. But there is no question that we should adapt government accounting as new and better measures for inflation and other metrics are created.