The euro and price convergence

June 11, 2014 No comments »

One of the euro’s founding objectives was price convergence. The hope was that consumer markets would become more integrated and prices would tend to equalize across countries. Our latest papers suggests that this is working precisely as intended for some industries.

In “Currency Unions, Product Introductions, and the Real Exchange Rate” [Cavallo, Neiman and Rigobon – Quarterly Journal of Economics (2014) ], we study the pricing behaviour of four industry leaders: Apple, IKEA, H&M, and Zara. These companies’ online prices are generally identical to their offline prices. We analyse how the prices of these stores differ across countries for identical goods, and evaluate how cross-country price dispersion depends on the currency of denomination. We find that prices from the exact same store for the exact same product differ significantly across countries outside the Eurozone, but are often identical within the Eurozone.

This single price within currency unions is particularly surprising because it is not driven by the lack of nominal exchange rate volatility. In fact, we find significant levels of price dispersion even in countries with fixed exchange rates (eg. Denmark). Further, this is not a purely euro-specific phenomenon. We compare prices in the US to dollarised countries (such as Ecuador and El Salvador) and to countries with strong pegs to the dollar (such as Jordan and Lebanon). The qualitative pattern is the same – prices of identical goods sold in countries that share a currency are more similar than prices in countries with different currencies, even in the absence of exchange-rate fluctuations.

Our latest paper, “The Price Impact of Joining a Currency Union: Evidence from Latvia” [ Cavallo, Neiman, and Rigobon – NBER Working Paper 20225, June 2014 ] provides additional evidence using data from Zara for the recent introduction of the Euro in Latvia.

The figure below shows the price impact of the Euro’s introduction in Latvia, on January 1st 2014. Price dispersion, which as significant before the change, was reduced dramatically after it.

Notes: The figure shows histograms of log prices for each country relative to Latvia (when expressed in a common currency). An x-axis value of 0 means prices are identical whereas a value of 0.10 means the price is about 10% higher in the listed country than in Latvia. The y-axis measures the percentage of observations corresponding to that x-axis value. Each bilateral pair includes two histograms, one from 2012-2013 when Latvia had a pegged exchange rate and a second during 2014 after Latvia joined the euro zone. The prices included are weekly prices on approximately 5,000 goods each month sold by the world’s largest clothing retailer.

Overall, these results suggest a greater role for consumer psychology or firm organisational structure in macro models of price determination. Furthermore, regardless of their motivation, the pricing structure which emerges carries implications for the theory of optimal currency areas and for the path of external adjustment. We hope to continue exploring some of these possibilities in future research.

US Index Update

July 22, 2011 No comments »

We updated the US Daily Index on the BPP webpage. Online prices remained relatively stable during June, with a monthly inflation rate that fell until June 21st and then gradually increased at the end of the month. The annual inflation rate increased slightly to 3.73%, but remains in line with CPI estimates.

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US Index Updated

June 20, 2011 No comments »

The US index has been updated here. We had been anticipating a slowdown in the all-items CPI, which was reflected in the BLS announcement a few days ago. The annual inflation rate appears to be stabilizing around 3.5%.

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BPP and PriceStats

May 6, 2011 No comments »

The BPP is proud to announce the launch of PriceStats, a start-up based in Cambridge MA with the mission of becoming a leading source of daily inflation statistics around the world.

PriceStats will allow the BPP to focus on research and continue innovating in the field of real-time price statistics. Our research team will have access to a greater amount of data than ever before, which will be collected, processed, and shared by PriceStats for use in our research initiatives and experimental indices. In addition, this arrangement will allow the BPP to continue publishing the daily US inflation and World inflation indices on a monthly basis.

PriceStats has partnered with State Street Global Markets to update daily inflation series in more than 40 countries through their client research portal, IR3. If you would like more information on how to access these series, please contact the PriceStats team at

PriceStats is a young company and the team is growing fast. If you are interested in technology and economics, and would like to join the team, please email

US CPI Inflation and Our Inflation Index

February 16, 2011 31 comments »

We have received a lot of emails regarding our index and what it implies for US inflation. In other words, is it time to panic or not? We are showing a lot of inflation in our retailers and the question is if this implies tomorrow the BLS is going to announce the end of the world as we know it.

Well, I will not answer that question directly. There are important things to remember, though. First, our index is not meant to predict the release the BLS does (and will do tomorrow at 8:30). Second, our index is based on online retailers, and the CPI is broader and has many sectors we cannot monitor online (yet!). Third, because we are protecting the companies from which we collect information we cannot reveal which retailers are included, nor the weights. Which makes our index less transparent, but until we incorporate more companies, we will keep it that way.

What does this mean? Our index, as presently constructed, is an “alternative” measure of US inflation, and if you are planning on trading — uniquely basing your decision on this index — I think you will be making a mistake. This is information that should be used as a complement to the macro models used in financial institutions. In other words, this is ONE additional piece of information (a useful and relevant one), but it is not THE ONLY piece of information.

We have constructed tracking indexes of the US CPI announcement, as well as those announcements in other developed economies. Those indexes are not published in this page. We are planning to construct those tracking indexes in as many countries as we can reliably construct them, and I promise we are trying to find a way to distribute that information so they can be used by all. I hope we can make the announcement soon – mid march possibly.

So, going back to the initial question, should we panic or not? well, I leave that to you. I hope the information we produce can allow you to make a better decision, but please, do not assume this index is a substitute for a formal decision process.

Price Index in Russia and other News

December 16, 2010 No comments »

A few updates from the BPP:

-We added a new daily price index for Russia. It has been tracking the official CPI remarkably well over time. Results can be seen on

-We are updating our index for the UK, so we have temporarily removed it from the site. The update involves adding data from more retailers, which will increase its ability to track official inflation.

For those of you who follow our indexes closely, we want to highlight several recent events seen in the data.

-Our index for China dropped significantly on November 23rd. This is likely linked to food-price controls announced by the Chinese government on November 16th. Our Chinese index is mainly composed of food and electronics, and even though we do not expect it to follow official CPI announcement closely in the short-run, it is clearly capturing the effects of some of these policies remarkably fast.

-In the US, discounts during Thanksgiving week had a smaller effect on average prices in 2010 than in 2009. Between November 18th (a week before Thanksgiving) and November 27th (the Saturday after Thanksgiving), the price index fell 0.08%. In 2009, the drop was 0.2% for the equivalent period of time.

US Inflation Tracking Index: November 2010

November 30, 2010 No comments »

As part of the BPP we are not only constructing average price indexes – such as those you can see in the web page – but also construct tracking indexes with the purpose of predicting macroeconomic variables. We are working on predicting the CPI seasonally-adjusted announcements, the PCE, and even the GDP. These tracking indexes use the information from daily price changes to improve standard models that predict the macroeconomic performance of the US economy.

We started in the most obvious place – trying to forecast what the BLS will announce in terms of monthly inflation. Although the BLS publishes the inflation of November in mid December, today is the last day of  the month so we already have a measure of the inflation rate of the retailers in our data. So, here we go…

Our prediction is that the BLS will announce November’s inflation rate (headline, seasonally-adjusted) of 25 basis points. Our models produce estimates between 21 and 27 depending on how the different prices are aggregated. Well, we now have to wait 15 days to see how close we are… that long? yes… that long.

An important point: this estimate is different from the inflation you can compute in the average of online prices (the indexes we are showing on this page). They are related but not identical. We are not going to release the tracking indexes yet. We are at the stage in which we are mostly testing and researching the best way to do the prediction.

MIT Sloan professors publish real-time inflation rates around the world in “Billion Prices Project”

November 8, 2010 3 comments »

CAMBRIDGE, Mass., Nov. 8, 2010 – Inflation is a significant measurement for the economic health of countries around the world, but rates are often reported weeks after data is collected. To address this problem, Professors Roberto Rigobon and Alberto Cavallo at MIT Sloan School of Management have launched the Billion Prices Project (, the first Website to publish daily price indexes and provide real-time inflation estimates around the world.

Over the past three years, the team developed a methodology to systematically collect prices of items sold by online retailers and compute inflation statistics on a daily basis. More than 5 million prices are monitored every day from categories such as food and beverages, household products, electronics, apparel, and real estate. While the project tracks prices in more than 50 countries, it currently publishes data for a smaller subset that includes the U.S. and U.K. as well as Argentina, Australia, Brazil, Chile, China, Colombia, France, Italy, Turkey, and Venezuela.

According to Rigobon, the project provides pricing data not only faster than what is currently available, but also in greater detail across countries. He points to the earthquake in Chile last winter as an example. “We tracked the prices of basic foods, water, and construction materials after the earthquake, which would be helpful information for government leaders trying to make decisions in real time.”

Cavallo notes that the “real time” nature of the data makes it particularly valuable in the current economic environment. “We’ve been tracking prices for three years and were able to detect very clearly when the U.S. recession began and when it ended,” he says. “Our U.S. average online price index started to dramatically drop only two days after Lehman Brothers went bankrupt in September of 2008 and we were able to see prices recovering in early January 2009, well before a trend could be seen in official CPI announcements.”

He adds that this type of data also is helpful in countries such as Argentina where the official statistics related to inflation are often unreliable. The Billion Prices Project has been publishing alternative inflation estimates for Argentina since 2008, and its index has become a widely used measure of inflation there.

In addition to providing inflation estimates, Cavallo and Rigobon also are using the data to conduct research on areas such as price-stickiness, price adjustments to shocks, the relationship between asset and retail prices, sales strategies, and premiums paid for green or organic products around the world.

The Billion Prices Project, says Rigobon, represents “a breakthrough innovation in the field of inflation statistics and is a great opportunity to conduct economics research that was impossible before. We want to improve the way inflation is measured and reported. Our data provides the right level of detail and relevance required to not only track official statistics, but also forecast future trends.”

For more information on the Billion Prices Project, please visit:

For more information on Prof. Rigobon, please visit:

For more information on Prof. Cavallo, please visit: