What is the Billion Prices Project showing us about inflation?


The Twitter source is here.  I would stress this is speculative, and I am not trying to argue we should panic about higher inflation.  I do, however, take this as additional evidence against the view that these days lack of nominal aggregate demand is a major problem.


It's not evidence against a lack of nominal aggregate demand. That exists in the lower to middle income marketplace which is not well served by productivity and ongoing services provisions. Default services provisioning (worst case scenarios) tend towards more expensive last ditch "rescue" efforts. Also, much of the red line is aspirational, thus not necessarily connected to optimal productivity. Optimal productivity is blocked at every turn at national and local levels by regulations which wreck the marketplace.

Did you just argue against aggregate demand by citing a segment? Isn't that a logical fallacy?

The problem here is that overall spending capacity has become capped at too low a level, so as to prevent further inflation which is caused by the preference for a middle to high income marketplace on the part of special interests. That cancels both (potential) production and consumption, and has led to a lower nominal target trajectory than the U.S. has experienced for well over a century.

"Optimal productivity is blocked at every turn at national and local levels by regulations which wreck the marketplace." Like China, we don't need clean air or water.

It isn't a problem if you reject level targeting. Should you reject level targeting is the question?

The CPI makes hedonic adjustments, which may cause the CPI to drift from "on the ground" indices.

here's the article...

it's the bad winter that's causing this. apparently, anyway.

Not just that; the divergence begins well before the bad weather. The other hypothesis on that article is that it also represents divergence in consumer purchasing habits; i.e., brick-and-mortar retailers tracked by the CPI are discounting to attempt to draw away consumers from online retailing, which is becoming more popular, relatively speaking.

Is the problem that investment capital can't be priced at the market clearing rate for any bond less than about 3 years in duration considered to be a part of the aggregate demand problem? Even if wage stickiness might have seen a slow attrition, isn't the bond market dislocation a potentially significant problem? We could use short term investment, and short term capital is overpriced.

Yes we should panic about inflation. Rising prices for positional or mostly positional goods basically means we all work harder for nothing. These are: education, housing, health care. To a couple considering starting or enlarging a family, a halving of the price of an iPhone does not make up for a doubling of a year's tuition at the University of Wasteful Signalling.

Agreed. My view on this sort of changes depending on my mood, but I think part of the reason why people still feel just as squeezed nowadays as they did decades ago despite being far richer is that extra income has simply gone to fund positional goods.

I also think people intuitively grasp that something is "broken" in healthcare and higher education pricing. I realize that a car (let's say a Camry, not a luxury car) is generally more expensive than a pair of shoes because it requires much more in raw materials and labor and technological/process know-how to make the car. I don't feel like I'm getting orders of magnitude overcharged if I buy a Camry. And yet...wait it can cost hundreds or even thousands of dollars for me to pee into a cup and have somebody put a stick into the cup that tells me if I have such-and-such a problem? That seems very off. Similarly, it costs $25,000 for a single semester at a college that involves maybe (let's be generous) 200 hours of actual lecture time? At that rate I could literally hire private tutors to teach me everything one-on-one. Yes TAs have to grade stuff but those poor souls make a mere pittance. Clearly something is off. Now of course some people think it's a problem of too much gov't involvement, and some too little, but I don't think there's any illusion that those markets are fundamentally broken somehow.

Only 10% of the staff of universities are educators - the rest are admin, maintenance, etc.

Remember, most colleges and universities duplicate functions already
existing in their environment : police force, housing , dining, health, gym/recreation,
medical, transportation. This for adults , even adults in their 20's and 30's.

This duplication of existing services must be expensive, although I have never seen a study
putting a dollar value to this . Besides the dollar value, providing these services has to detract
from the core function : teaching and research.

That's like saying one neighbourhood is wastefully duplicating services in the one next to it. Universities are medium-sized towns, where thousands of people live and work, and thousands more people commute for work. Of course they will have these facilities.

You can argue (though not always correctly) that the pricing is non-transparent because some services are rolled into peoples' employment or education contracts, but that is different from saying those services are unnecessary.

J, it seems like your examples "home in" on fixed costs and marginal costs. The examples of getting a test result, or adding an extra student to a lecture are more marginal expenses by nature. A pair of shoes and a car have less of a "marginal" perception about them, regardless of the true economics. I agree it seems "off", but I wonder if it's built into our irrational tendency to want to pay less for work that requires less marginal effort? Kindof like paying the repairman $30 for the part, and $300 for the years of knowledge for knowing which part to replace.


For a deeply researched and developed drug, the first pill costs $2BN and the second one $0.01.

It's not that different from a CPU. Where the first one may cost $1 billion and everyone thereafter $5.

How irrational is this? If the marginal cost is low, we would like suppliers to somehow drive the price down to that marginal cost. Of course we can't always have what we want.

Whether the real price is fair depends on the regulations and practices. Mechanics don't by dividing the cost their educations and dividing their number of expected lifetime customers, they set prices based on market conditions. People distrust mechanics because they are often get a large bill only after the service is rendered -- it's hard to shop around. Much the same goes in the medical area, though people there tend not pay out of pocket.

One problem with medical and education costs is they don't scale. A car requires a lot less labor than it did 40 years ago, a patient visit requires a very similar amount of labor as does an education. I could add things like Medicine can do a lot more than it did in the 1970s and class sizes are smaller today and we have decided we need more administrators in both fields as well, but that is a different issue

Plenty of people have mentioned this for decades now, but nobody ever seems to remember it.

"a patient visit requires a very similar amount of labor as does an education. - See more at: http://marg"

Well, yes, but the cost is not the same adjusted for inflation, it's much higher.

As J noted there are a lot more administrators, but also think of it this way. A Doctor can see only so many patients, if each visit takes the same time that number is the same today as it was in 1950. Productivity can only be increased by decreasing the length of each visit. Add the cost of administrators, the fact that Drs have to actually know more than they did in 1950, have more continuing education, etc... and you are just not going to get the productivity improvements you see in manufacturing or office work.

Also while electronic records may speed record transfer they actually make patient visits take longer and increase the need for staff for compliance.

I have an older presentation touching on that:


Automated Detection of Retinal Disease: when Moore's law meets Baumol's Cost Disease

Why do some forms of education (non-government funded) and medical care (cosmetic surgery, Lasik, etc...) get exemptions from the massively rising costs of the majority of their industries?

Answer that and you'll be much farther along on your attempt to figure out health and education costs than you are now.

I smell a trap!

They answer is there is no such categorical exemption. Catholic high school tuition has skyrocketed in the past 20 years, despite being non-government funded. I'm sure you can point to some anecdotal counter-examples as well, but it's not so simple as "the bogeyman/government did it"

The answer is not government per se, but that in an a model where the consumer gets a service regardless of the amount they pay, the pricing signals do not reach the consumer and there is no incentive to shop around.

AKA no price competition.

For education, think of student loans - students (or their parents) who think a particular school is too expensive can eliminate that objection by getting a loan, promoted by the school no less, instead of responding by getting their education elsewhere.

Those are good points Shane, Roy, and Guest. Admittedly I am being not entirely thorough with the treatment of fixed costs and scale. But I think the point still stands in that medicine and education have not become more expensive because doctors, nurses, professors, and TAs are much more generously compensated (a la Baumol) but because both industries are now supplemented by a vast army of "administrators" whose value is dubious.

I don't know that much about the higher education system of France, but I find it interesting that France's public system is known for being actually pretty bad. It really doesn't do a great job, but it's cheap cheap cheap, and as far as I can tell doesn't seem to noticeably harm France's labor productivity (67 vs. 59 according to Wikipedia, and I think that can mostly be attributed to other factors). So what are we blowing all this money for on something that is probably mostly signaling?

"doesn’t seem to noticeably harm France’s labor productivity"

Labor productivity is a poor measurement for overall economic harm. France's total productivity and/or it's productivity per capita is low. The most obvious reason for it's high labor productivity, is that French businesses are resistant to hiring workers that are anywhere near the margin.

And being chronically ill because of lousy medicine can create a ZMP worker who otherwise wouldn't be.

That is a good point. But then I guess let's look at it this way. Does France's economy seem like it's held back in any noticeable way by having an insufficiently educated workforce? As long as you've got competent engineers and accountants, I don't get the impression that France's economy suffers from its less than stellar higher education system. That leads me to think we're very likely overspending (or at least malspending) in that category.

"Does France’s economy seem like it’s held back in any noticeable way by having an insufficiently educated workforce? "

I'm not sure there's anyway to tell, definitively. But to believe that education isn't a constraint implies that increasing the average education level in France would not help the Economy at all.

So, if you were to send 3 million French university students (all of them) over seas to the worlds best schools every year until they graduated and then sent them home afterward, the additional education would add absolutely Zero additional growth to the economy. That seems implausible.

I think it depends. If they were studying a STEM field then yes that would probably help, but if they're studying French lit or archeology, I really don't see how going to a "good" private US college would really help enhance a person's productivity all that much, other than to help build contacts among future movers and shakers, enhance prestige, signal, etc., but that really has nothing to do with the education itself and wouldn't change anything in the aggregate.

It would be the first 20% of the students that would provide the bulk of the benefit. Most people do not need to go to college.

"Yes we should panic about inflation. Rising prices for positional or mostly positional goods basically means we all work harder for nothing. These are: education, housing, health care. To a couple considering starting or enlarging a family, a halving of the price of an iPhone does not make up for a doubling of a year’s tuition at the University of Wasteful Signalling."

Depends on the type of inflation.... http://tinyurl.com/uwehfw9ef8k

ironically, those flashy expensive positional goods are actually cheaper adjusted for inflation that essential services.

And a lot of those tuition increases are a result of declining state funding for higher ed.

Short TIPS and go long on nominal bonds! Risk-free profit!

That's funny did you not argue the opposite a year or two ago?

The chart shows the BPP lower than the CPI a year ago.

Garbage in garbage out.

Any government that defines inflation in terms other than the cost of families raising replacement population to viable adulthood is guilty of genocide.

Elizabeth Warren’s magnificent work on the economic plight of families shows that the genocide of the American Nation of Settlers started at least circa 1970.

However, despite Elizabeth Warren’s work being magnificent — it was far from adequate. It was magnificent compared only to her peers in academia and government for whom the standard lies about the demographic collapse of the Nation of Settlers formed a virtual catechism that she, herself, transcended only after being beaten over the head with the actual data. So Elizabeth Warren was a magnificent mule who, unlike the other mules, had a 2×4 applied directly to her head to get her attention. That doesn’t mean she did more than begrudgingly move the discourse forward — a relatively magnificent accomplishment given the abject insularity of “the great and the good”.

If she had been truly anti-genocide she would have adopted this definition of inflation:

“the cost of families raising replacement population to viable adulthood”

and followed through with more than just her work on the purchase prices of critical _things_, such as a house, car, health insurance, food, education to remain in the middle class, etc.

How could there be a significant amount beyond that?

Women’s choice.

The quadruple whammy of widespread birth control, options for an “empowering career”, misleading myths about the attractiveness of women in their 30s and beyond (a constant theme in “chick flicks” to this day) in addition to a wide array of government transfer programs protecting and targeting women had the cumulative effect of seducing women away from reproduction.

Indeed, one might call it an addiction targeting women and their total fertility rate.

Given the pervasive offering of this heroin that merely cost women their total fertility rate, what would be the monetary cost of buying a woman back from her hard core mainline sterilizing habit?

A government that had this definition of inflation that honestly looked at the human ecology would be forced to confront facts that are still censored from public discourse.

Another way of looking at this genocide is through the lens of classical economic theory’s “Iron Law of Wages” which states:

‘According to Lassalle, wages cannot fall below subsistence wage level because without subsistence, laborers will be unable to work. However, competition among laborers for employment will drive wages down to this minimal level. This follows from Malthus’ demographic theory, according to which population increases when wages are above the “subsistence wage” and falls when wages are below subsistence.’

What the classical economists never counted on was the quadruple whammy “empowering” women I mentioned in above.

Those who object, saying this is merely a case of “the demographic transition” have a lot to answer for when “the demographic transition” results in racial replacement.

End of discussion. Start of trials.

Go home Jay, you're drunk.

Is the billion price project chain-weighted? IIRC, it tracked a non-static basket of goods randomly selected each day. I may be misremembering. If so, then it would be better to compare it to the Chained CPI.

good article..it further refutes that we're in a secular stagnation which is a topic I wrote about just last week

If you go to the MIT website and look at the series, rather than the truncated piece selected here to advocate a point or raise speculation, you will see trend with red usually above blue, or at least one that has a longer time period.

The data is here: http://bpp.mit.edu/usa/

Yes, there is that. However, one of the more common retorts to claims the CPI understates inflation is to reference the Billion Prices Project that tracked the CPI roughly up to November of 2012 (they both had measured the same inflation from the inception of the project to that point, though through sligtly different paths). The recent divergence is quite long now and growing. Best to take another look in a year and see if one or the other catches up or down to the other.

Does that statement really make sense: consider: CPI measurement methodology didn't change during the period, nor did Billion Prices Project change its methodology during this period. The recent divergence is quite long now statement actually doesn't match the data at the bottom of the MIT page, either.

Yes, the divergence is the longest on that chart. I think it still too early to make much of it- previously the BPP read higher for shorter times, but the two still converged again to the same overall inflation from the inception of BPP til about November 2012. After that point, the gap has grown in the overall measure of inflation since the beginning of BPP, with the YOY rate of the CPI being persistently below the BPP YOY rate.

Note, there are two charts in your link, not just one, and the top one is not the one Cowen reproduced- he reproduced the bottom one.

Yancey, I know there are two charts...that's why I pointed out the selection of charts that Tyler made, and I thank you for pointing out that by amplifying the the x axis Tyler exaggerated the discrepancy.

Now, if you take the monthly chart on the bottom of the page, I dare you to show that there is a persistent bias of the BPP over the CPI.

Finally, you do understand, don't you, that the BPP is just a collection of online prices, and not the same composite as the CPI.

I don't think the audience, furthermore, realizes that the Billion Prices database is simply online prices, either. So, let's say, Amazon now realizes that they have to make a profit, and hikes its prices, this skews the index...because they will no longer take less margin...but this has nothing to do with the underlying market.


derek, Online "prices" include markup. Furthermore, online prices do not include discount...so if I aggregate orders and get a discount, the list price is tracked by each bot, but not the aggregated discount from my larger order. Nor does the bot take into account free goods or shipping.

Also, derek, if you go to the link I posted, and to the last chart on the page (monthly inflation per BLS and the Billions of Prices index) you will see no difference, or a random change across a longer time period. Just go to the site.

Isn't that the point?

I interpret the chart - even the one you cited - as the CPI typically understates inflation relative to the BPP, but eventually the CPI catches up. Presumably, because the CPI has a lag in data that the BPP does not.

Thus, the takeway is that, since the BPP is above the CPI, and has been for a time period, we are due for a correction in the CPI. Inflation is higher than we think it is.

Exactly my point, which Bill completely misunderstood.

Yancy and Cliff, Look at the bottom chart of monthly BPP. Its noise around the same CPI. All Tyler did was explode a favorable time period. I could explode different time periods, or I could take a time period and compress it to make it look differently. What you need to do in this time series is run it long and look for measurable deviation from a long series. And, Yancey, please tell me what point I missed...saying it doesn't make it so.

Also, there is a composition problem which I mentioned above. This is a series composed of online prices unadjusted for discounts, free goods, or free delivery, the parameters of which can vary with the vagaries of Amazon's, for example, financial desires.

BPP is good for world measures where the state, like in Argentina, underreports.

Also, Chris, it is not the case that your presumption.."Presumably, because the CPI has a lag in data that the BPP does not." - No, the BPP has a different composition than the CPI. BPP says that its index is of online pricing. Period. CPI is a much larger composition, including housing rents, doctors services, etc.

Any theory behind the billion prices? Or is this a mean of some kind? If so, who cares [for now]?

If you look carefully you can find clues that there is sufficient aggregate demand. It is just not showing up in GDP or employment stats. Unit labor costs are frozen too. The PCE deflator running at half of target. We have labor surpluses and unused capacity and no one seems to have pricing power.
But the the billion-price survey says we are around (horrors) 2 percent inflation and that means aggregate demand is okay....
I sense Tyler Cowen starts with a premise---money should be tighter--- and works backward through infinite amounts of data to support premise. But then, that is polemic blogging, is it not?

Maybe the billion price CPI is a leading inflation indicator? The episode over late 2011 and early 2012 seems to suggest so, with the billion price CPI falling faster than the CPI.

Why would this be? Presumably menu-costs are lower for online prices... They can be changed with click of a button, and therefore may be more sensitive to permanent shocks in a Ball and Mankiw sticky price model?


I'm curious, how does the BPI take shelter into account that depending on exactly what you look at accounts for some 20% to 30% of the CPI?

You don't have to be curious. Just look at what they include, and more importantly, don't include in the index. Go to the site at the link I posted above. It is simply online prices.

You don't have to be curious. Just look at what they include, and more importantly, don't include in the index. Go to the site at the link I posted above. It is simply online prices.

The headline CPI right now (and for the last 11 months) has been dragged lower by one-time Medicare price cuts that were induced by the sequester. A much better indicator of inflation currently is the Median CPI, which is not influenced by outsized moves in small categories. It is at 2.1% and thus much more consistent with what PriceStats is saying.

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