Top1000funds.com’s Sam Riley talks with Jessica Donohue, a senior managing director at State Street Associates, about the drive to move beyond traditional inflation measures.
An innovative partnership between academics at MIT Sloan Business School of Management and State Street Global Markets is helping investors gain valuable insights into inflation trends, using real-time price data gleaned from the web.
The methodology behind the PriceStats State Street Inflation Indices is the brainchild of MIT academics Roberto Rigobon and Alberto Cavallo. The pair developed their system of trawling the web to “scrape” price data from a range of products sold online.
PriceStats has been expanded to measure inflation in real time across a range of countries in both developed and emerging markets.
Donohue (pictured) says the creation of inflation indices from online data provides the capacity to measure a far broader basket of goods than traditional statistical measures.
The goods covered include food, beverages, household products, entertainment, electronics, appliances, apparel, furniture and over-the-counter drugs.
“The country indices are not meant to be a replication of the official statistic; it is meant to show the trends that we expect out of that official statistic,” Donohue says.
“This is much more about understanding the trends than it is about trying to predict in any way the exact CPI [consumer price index].”
PriceStats standardises measurements of inflation across different countries, where there are currently wide variations in the methodologies used by different statistical offices.
This allows for cross-sectional analysis across a range of countries, and also for more accurate direct inflation comparisons between countries.
Another advantage of the system is that data gleaned from online sellers typically leads the price changes of offline retailers, offering an early warning to investors of likely inflation movement, Donohue says.
“[PriceStats] is going to pick up inflation and deflation, and it is going to pick it up in general two to three months ahead of the official statistics,” Donohue says.
“Over the last three to four quarters in the UK the PriceStats State Street Inflation Index was about three months ahead of where the official statistic ended up being.”
State Street has long believed that inflation is a crucial economic measure for investors, affecting interest rate policy, driving bond prices and a being a key influencer of currencies and equities.
“This information is very useful for investors because it gives them a sense as they tilt their asset allocation as to what their expectations should be around inflation,” she says.
The initial focus of PriceStats has been on measuring inflation, but State Street sees a range of innovative uses for the indices, including as a tool to better understand currency movements.
“If you take the country with the highest inflation and the country with the lowest inflation you are going to see the [currency] appreciation and depreciation respectively that you might expect,” she says.
The index can also be used to provide insight into potential interest rate movements in particular countries, which can provide additional information to fixed income managers.
State Street is also looking at how the PriceStats indices can be potentially useful for equity investors.
PriceStats looks at price information from 70 countries but produces country-specific indices on Australia, Brazil, France, Germany, Ireland, Italy, Japan, Netherlands, Spain, UK and the US.
In the next two weeks, State Street will release new indices looking at emerging markets. In Latin America, PriceStats will monitor Argentina, Chile, Columbia, Uruguay, and Venezuela; it will also cover Russia and South Africa.
In Europe, PriceStats will gather information about price movements in Belgium.
State Street also plans to expand its monitoring to specific sectors.
“We have started with country indices but we plan to move into sector indices and then we can even look at drivers, so what [are] the sectors that are driving inflation either up or down,” she says.
PriceStats researchers are expanding their monitoring of prices to include job adverts, which indicate that wages have been rising in the US for the last three months, despite high unemployment. State Street says the PriceStats figures are showing that the US may be entering a period of stagflation.
“The fact that you are seeing inflation levels continue to be elevated in the US, coupled with low growth, is an indication that we could be heading into a stagflationary period,” she says.
In an indication of the increasing disparity in economic outlooks for various Eurozone countries, PriceStats has identified a disparity between Germany and France, with inflation falling in France but increasing in Germany.
In the UK, PriceStats indicated that inflation peaked at around 5.5 per cent and latest monthly figures show the first decline in inflation after that country’s most recent round of quantitative easing.