What's Missing From Google's Proposed Inflation Index

Google logo on bus
Google logo on bus

Internet search giant Google (GOOG) knows so much about what people do on the Web -- including shopping -- that it wants to start using the data it collects for economic measures and forecasting. The company is using its vast database of Web-shopping data to construct a daily measure of inflation called the Google Price Index, or GPI, the Financial Times reports.

The GPI is the work of Google's chief economist, Hal Varian, and it shows a "very clear deflationary trend" for Web-traded goods in the U.S. since Christmas, the FT reports. This compares to the official consumer price index's "core" rate, which excludes food and energy and rose 0.9% year-over-year in August.

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Varian, who spoke at the National Association of Business Economists conference in Denver, said the GPI is a work in progress and Google hadn't decided yet whether to publish it. But could it one day provide an alternative to official statistics?

Well, speed is definitely a bonus. Official CPI data are collected by hand from shops and businesses and published only monthly with a time lag of several weeks. But Google can gather its data much faster and publish daily.

However, the mix of goods now sold over the Internet is very different than those sold in the wider economy. Housing accounts for about 40% of the U.S. CPI, for example, but only 18% of the GPI. So while the GPI indeed shows a "pretty good correlation" with the CPI for goods commonly sold on the Web, it's less accurate for everything else.