A Blog by Jonathan Low

 

May 27, 2013

Online Consumer Price Index vs Traditional Method Sparks Debate - In China

The relationship between prices in traditional markets and those online is the source of heated debate, much of it uninformed by anything as basic as actual data.

Academics in the US and Europe have experimented with such comparisons and generally found the two sets of indices to be pretty similar.

But it turns out that China is the first and most significant nation to have a statistically significant data set, thanks largely to the efforts of the Alibaba Group, that country's - and one of the world's-  largest e-commerce behemoth. Unlike some of its western counterparts, Alibaba has been using its dominant market position to attempt to change the way business is conducted and measured.

What the new metrics have demonstrated is that the online index shows inflation to be considerably higher than that of the official government indicators. There are many countries, including the US, where the government has been accused of adulterating inflation figures to make consumers believe conditions are not as bad as rumored. China has also faced such accusations but has generally brushed them off. That Alibaba was allowed to create this index and then permitted to publish the results in a notoriously control-oriented political system suggests that the powers are comfortable with the experiment, even as it challenges the veracity of approved government economic assumptions.

It is possible that the government does not believe the majority of Chinese buy all that much online or that those who do are from relatively wealthy and educated classes who have access to such information anyway.. But it may also be that the government, attempting to rein in inflation and tamp down the Chinese version of 'irrational exuberance' views this data as helpful to its strategy - and that the government appreciates the public relations value of having beaten the west in this sort of intellectual property competition.

The implication for the west is that there will be greater demand both for the data and the comparisons. That the Chinese have led the way is simply further evidence that the world is becoming flatter - and more competitive. JL

Zhang Huangyu reports in Caixin:

As online shopping has become an important part of retail sales, some experts have suggested that broader sources of data should be included in the CPI calculation and different weight should be given to different categories of purchasing activity to monitor more precisely price changes for various groups of people.
There has been much discussion over whether an index tracing online retail prices is a more accurate reference for China's level of inflation.
Recently, E-commerce giant Alibaba Group announced that its Internet Shopping Price Index (iSPI) showed that consumer prices in April rose 6.99 percent compared to the same month last year. However, the consumer price index (CPI), which has long been used as a barometer of inflation, was only 2.4 percent.
Alibaba's iSPI was launched in 2011 to track price fluctuations on the company's customer-to-customer platform, Taobao.com, and the business-to-customer Tmall.com.
The great difference between the two readings has triggered debate.
In the United States, professors at the Massachusetts Institute of Technology are working on the Billion Prices Project, which tracks global internet shopping prices. Records show that its readings are quite close to the United States' official CPI readings.
In China, debate over CPI statistical methods has gone on for a long time because many people say that they suffer higher inflation than official data indicates.
But can a figure taken from a huge amount of online shopping data provide a more accurate index than the CPI? For now, the answer is no.
The quality of a price index is determined by whether it can, in a sophisticated and comprehensive manner, reflect price fluctuations for consumers.
Alibaba's iSPI uses nine categories of products on Taobao and Tmall. If we look at its figures for the period from January 2009 to June 2011, the iSPI weight given to food products is 3.7 percent, much lower than the more than 30 percent in official CPI statistics.
People still mainly rely on supermarkets and outdoor markets to buy food, especially fresh products like meat, vegetables and fruit. Thus, statistics on food purchase on the Net are not representative and comprehensive.
Clothing purchases account for as much as 40 percent of online shopping. The prices of clothes sold online are usually much lower and fluctuate more than in actual stores because fewer intermediaries are involved.
Meanwhile, statistics for medical products and services are incomplete because some products and services cannot be sold online.
There are still big differences between patterns for online shopping and shopping in actual stores.
Nevertheless, iSPI is still a good supplement to traditional price indexes in understanding the consumption picture. It also offers valuable information for data miners watching consumer behavior.
Also, iSPI is expected to push statistical authorities to improve their methodology. Data for China's CPI statistics is collected from 63,000 stores and markets across the country, but online retail has long been neglected.
In 2012, China's online sales reached 1 trillion yuan, or 5 percent of total retail sales. A report by consulting firm McKinsey & Co. predicted that by 2020, China would have online retail sales of US$ 420 billion.

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