Get Ready for More Coronavirus Disinflation, at Least in the Short Run

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Online inflation as measured by the MIT Billion Prices Project/PriceStats, which tracks prices in real time on a daily basis on websites such as Amazon.com, has continued to fall throughout the month of May, even going slightly negative (implying some deflation). How can such disinflation be possible, given that the Federal Reserve has expanded its balance sheet by trillions of dollars over just the past few weeks, and that the coronavirus has distorted global supply chains, causing shortages?

What one game show reveals about the American economy

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Since 1972 Americans have sat through more than 9,000 episodes of “The Price is Right”, a game show with an economic twist. After being summoned from the audience by the famous catchphrase—“come on down”—contestants must guess the exact price of prizes, ranging from guitars to garden furniture. Contestants have got a lot worse at guessing prices. Why?

Brookings – “Hutchins Roundup: State estate taxes, occupational licensing, and more”

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Since 2018, the U.S. has imposed import tariffs ranging from 10 to 50 percent on goods from China. Using data collected at the border and at retailers, Alberto Cavallo of Harvard University and coauthors estimate that, on average, foreign exporters have passed 92% of the cost of the tariffs on to U.S businesses in the form of higher prices.

The New York Times – “Trump’s China Deal Leaves the Global Economy as Uncertain as Ever”

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President Trump’s trade truce with China may have temporarily cooled tensions between the world’s two largest economies. Anew paper by researchers at Harvard University, the University of Chicago and the Federal Reserve Bank of Boston suggests that businesses and consumers in the United States are feeling an impact from the trade fight and that the pain could escalate.

The Economist – “Technology is making inflation statistics an unreliable guide to the economy”

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Amazon is used to fielding accusations: that it has killed off physical retail business, that it mistreats warehouse workers, that it abuses its dominant platform in online sales. So perhaps it is not a surprise that some people also blame it for low inflation. In 2017 Janet Yellen, then chair of the Federal Reserve, wondered aloud if cut-throat online competition might be stopping goods-producers raising prices even in a world of rising demand. Alberto Cavallo of Harvard Business School has found that Amazon’s prices are 6% lower than those of eight large retailers, and 5% lower than on those retailers’ websites.

BBC News – “Trump’s tariffs puts Apple’s golden goose at risk”

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Donald Trump has threatened to impose a sweeping new round of trade tariffs against imports from China. According to analysis by Reuters, it would mean 92% of hardware sold by Apple would face levies.
If the tariffs are indeed imposed in December, it could mean several outcomes – none of which Apple will be particularly keen on, explained Alberto Cavallo, an associate professor at Harvard Business School.

Today – “Get smart about shopping online and save money”

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The reality is that offline and online price levels are identical about 72 per cent of the time. The figure is based on a study by Harvard Business School’s Associate Professor Alberto Cavallo, whose research covered 24,000 products in 10 countries, including Australia, China and Japan.
Drugstores and office-product retailers have the lowest share of identical prices, while electronics and clothing stores have the most.  

The Times – “Dynamic pricing may look like a rip-off but has benefits for us all”

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Weimar! Zimbabwe! These were the historical precedents genuinely expressed a decade ago about what an unprecedented experiment in monetary policy would do to advanced industrial economies. A huge expansion of the money supply, through quantitative easing, and near-zero interest rates might be an immediate palliative in a deep recession but they’d spark an inflationary crisis later on. And high inflation wipes out savings and destroys living standards.

DNA India – “The Amazon effects and monopsony”

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A paper by Alberto Cavallo of Harvard University found evidence that the algorithms used by internet-based retail giants like Amazon to constantly change and adjust prices have led to greater price fluctuations in response to various macroeconomic shocks. This so-called ‘Amazon Effect’ not only forces brick-and-mortar outlets to respond in a similar manner but also
-> Continue reading DNA India – “The Amazon effects and monopsony”

MIT Management Sloan School – “Measuring the Facts: Using Data to Tell the True Story of Inflation”

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MIT Sloan professor Roberto Rigobon and Harvard University professor Alberto Cavallo are the co-founders of the Billion Prices Project. The project collects prices — it has around 15 million prices today — provided by online retailers around the world. The public data is used to conduct research in macroeconomics and international economics. The professors say
-> Continue reading MIT Management Sloan School – “Measuring the Facts: Using Data to Tell the True Story of Inflation”

CNBC – “Under ‘Amazon effect’ retailers could be more exposed to supply shocks”

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Harvard Business School found that the average duration for regular price changes fell to 3.65 months in 2014 to 2017 from 6.7 months in 2008 to 2010. It also investigated how prices at Amazon, Walmart, Best Buy and Safeway vary across geographic locations. Harvard’s Alberto Cavallo concludes that the paper’s most important finding is that
-> Continue reading CNBC – “Under ‘Amazon effect’ retailers could be more exposed to supply shocks”

ECB Press – “Policy analysis with big data”

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The recent financial crisis, and the euro area sovereign debt crisis that followed, were characterised by periods of increased heterogeneity, market fragmentation and sudden turns in economic activity. This often made it difficult for economic policymakers to understand and assess in real time the underlying forces driving economic behaviour. Both traditional statistical datasets and our
-> Continue reading ECB Press – “Policy analysis with big data”

MIT News – “Intermittent attention, poor memory shape public perceptions of inflation”

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Do you know your country’s current inflation rate? What do you think it will be in the future? And how do you, personally, try to plan your finances accordingly?

Those are important questions for economists and policymakers, because central bankers generally assess future expectations of inflation when setting interest rates.
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Seeking Alpha – “Inflation Nation (Part 2) – What does our low inflation environment mean for investors?”

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Inflation is an average. Prices in some areas are growing quickly, while others fall. That’s the way it has to be in a broadly diversified economy. The broadest measure of inflation – the personal consumption deflator – measures everything that consumers buy, and weights it by how much, then spend on those items.
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La Nación – “Por qué los economistas llegaron tarde al big data”

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Como esta tecnología ofrece un gran volumen de datos, pero poca información sobre un aspecto particular, se demoró su adopción

“Cuando tenés un martillo todos los problemas se parecen a un clavo”, reza la así llamada ley del instrumento, enunciada por el filósofo americano Abraham Maslow allá por los sesenta en relación a la sobreconfianza en una herramienta, ya sea porque el analista invirtió demasiado en ella o porque está de moda.
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Infobae – “Un argentino y un venezolano miden su propia inflación con mil millones de precios por día”

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Alberto Cavallo y Robert Rigobon, economistas del MIT, comenzaron con la web Inflación Verdadera tras la intervención del Indec, pero ahora estiman la suba de precios todos los días en más de 60 países.
La intervención del Instituto Nacional de Estadísticas y Censos (Indec) produjo un giro académico para dos economistas a más de 8.500 kilómetros de distancia.
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The Sydney Morning Herald – “Why shopping online at Coles is more expensive than in stores”

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Coles shoppers are paying a hefty premium on some groceries when they shop online and use the supermarket’s supposedly free “click and collect” service or home delivery.
Fairfax Media compared in-store and online prices on 10 popular brand label items at Coles and found eight of them were 10 per cent more expensive for online shoppers.
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Seeking Alpha – “Weekly Indicators: Introducing The Billion Prices Project Edition”

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Monthly reports for February included new home sales, which set a new post-recession high, and existing home sales, also higher, and a higher CPI. Durable goods were down for the 4th time in 6 months, and the University of Michigan sentiment indicator improved from its first March reading, but has continued to back off its January post-recession high.
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Forbes – “Online Prices Indicate Russian Inflation Spike After Ruble Decline”

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Russia’s economy looks eerily similar to the 1998 Russian financial crisis which was also characterized by significant declines in the price of oil, a significant decline in the Ruble, sharp hikes in the central bank’s key rate, and now a significant run-up in inflation according to data from PriceStats which tracks daily inflation in 22 countries including Russia by monitoring online prices.
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The Wall Street Journal – “Oil Is Dragging Down Prices Faster Than Official Price Index Can Capture”

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onsumer prices around the world are pulling back so rapidly, along with the collapse of oil prices, that official measures of inflation have yet to capture the magnitude of the decline. But the Billion Prices Project, which scrapes the Internet daily to capture changing prices online, is recording a significant and broadening plunge in consumer prices.
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The Washington Post – “This billionaire thinks the Fed is missing the hyperinflation in the Hamptons”

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The prices of houses in the Hamptons and high-end art are the “leading edge of hyperinflation.”
Never underestimate the ingenuity of inflation truthers. Every time it seems like they’ve hit rock bottom intellectually, they manage to come up with new and even more ridiculous reasons for why inflation is supposedly higher than the official numbers say it is.
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Bloomberg – “Another Reason Not to Fear Inflation”

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The Fed shouldn’t worry too much about the recent surge in consumer prices. It’s most likely a catch-up after a tough winter.
U.S. inflation has been accelerating in recent months, presenting the Federal Reserve with a tricky question as it decides how quickly to remove stimulus from the U.S. economy: Is the rise in prices a precursor of things to come or simply a “catching up” phase as people begin to spend again after a brutal winter?
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Business Insider – “Now HERE’S Some Government Manipulated Economic Data”

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A recent tweet by Jack Welch alleging that Friday’s jobs report was manipulated has sparked a ton of interest government data, and whether or not it is manipulated, or can be.
In a recent Fiscal Times piece (via Reuters), economist Mark Thoma makes a good defense of US data quality, while noting at the end that there are countries where manipulation does in fact happen.
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The Australian – “Central bankers’ window to go for broke”

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Falling price pressures around the world will allow central banks to increase their use of monetary stimulus to boost growth, according to MIT economics professor, Albert Cavallo.
In an interview with Business Spectator, Cavallo said the world was now witnessing global disinflation. Indeed, there are now only three countries where inflation is not on a downward trajectory – Russia, South Africa and Brazil.
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The Economist – “Price in a trice”

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Online retailers offer an immediate measure of inflation
IF THE inflationistas are right, where should they look for signs of accelerating price growth? Many are suspicious of official numbers: John Williams, the boss of an inflation-statistics website called ShadowStats.com, claims American inflation has been underestimated for decades because the Bureau of Labour Statistics (BLS) regularly changes its basket of goods on the ground that consumers shy away from expensive items. And official data are slow to come out.
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The New Yorker – “A Billion Prices Now”

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Between official government statistics, industry surveys, and Wall Street forecasts, it often seems like we’re drowning in data, often of uncertain value. But consider the alternative. In the early years of the Great Depression, it was clear that things were awful, but the government had few good figures to go on; there was no official G.D.P. number, and no solid information about unemployment.
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The New York Times – “Billion Price Preview”

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One indicator I’ve been tracking lately is the MIT Billion Price Index; it basically tracks the goods component of the CPI, but of course has higher frequency, so it’s kind of an early warning indicator.
And the BPI has, of course, showed a bump in short-term inflation lately. My prediction was that this bump would prove largely temporary, just as previous blips — both positive and negative — have.
[…]

Business Insider – “The Billion Prices Project And The Fed’s Next Move”

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What happens when commodity prices rise by 30% in just 6 months and you have an environment with high unemployment, stagnant wages, and generally weak end demand? According to the Billion Prices Project you get a modest year over year increase in inflation rates. According to the most recent real-time reading the BPP is up 2.83% versus last year.
[…]

Clarín – “Mil millones de precios y el sueño de un INDEC virtual”

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A mediados de 2009, los economistas Vernon Henderson, Adam Storeygard y David Weil sorprendieron al ambiente académico con una idea disparatada y original: las fotos de la superficie terrestre tomadas por satélites desde el espacio exterior podían aportar un muy buen “proxi” para medir los incrementos de PBI en los países, prestando atención a las imágenes nocturnas de zonas iluminadas con luz artificial.
[…]

The New York Times – “The Billion Price Index”

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Some commenters have been claiming that the MIT Billion Price Index is telling a very different story from the official Consumer Price Index. So I guess it’s worth pointing out that it really matches pretty well.
What you need to realize is that the Billion Price Index, inevitably, only covers goods — not services. So it’s got a narrower focus than the CPI.
[…]

MIT News – “The price is right”

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How a new online tool can help measure inflation as accurately as — and more quickly than — traditional methods.
Inflation is a crucial economic indicator, since rising prices can hurt consumers and trigger political discontent. It is also hard to measure. In the United States, Bureau of Labor Statistics employees track over 20,000 prices in person or via phone, which are then aggregated into the Consumer Price Index, a monthly gauge of price levels.
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The New York Times – “10th Annual Year in Ideas – “The Real-Time Inflation Calculator”

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Measuring inflation is a time-consuming business: at the beginning of each month, government researchers across the country amass troves of data on prices for everything from shoes to milk to phones. Two weeks after the end of the month, the government releases gauges of inflation like the Consumer Price Index. But inflation hunters may now get an advance glimpse of the data, thanks to a real-time inflation calculator devised by two economists at M.I.T., Alberto Cavallo and Roberto Rigobon.
[…]

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