Killing off the lagging indicators

As the financial world reacts to the flood of US data on tap this week, there is one question worth asking: why do we care so much about out-of-date data?

It doesn’t matter that this week’s figures have been delayed by Washington’s standoff; they are dated when they are released in normal circumstances. Australia is no different, with arguably the most closely watched data point by the Reserve Bank of Australia – consumer price inflation – only released once every quarter. Even then it‘s not available until three weeks after the quarter ends.

“The majority of indicators and indices today are based on decades-old models and manual reporting structures that don’t reflect the profoundly accelerated nature of the globe’s economic life,” explains David Soloff, the co-founder of a new data group that could shake up the status quo.

Premise Data Corp can tell you right now that inflation in the US picked up from early September and has largely kept rising ever since. It can also advise its customers that Chinese food inflation has become an increasing problem since the latest official figures came out from Beijing.

Premise reaches these conclusions through the analysis of data from traditional bricks-and-mortar stores as well as online retailers.

In all, the San Francisco-based upstart captures between 40,000 and 50,000 data points every hour by merging an offline library – created by 7,000 part-time workers taking pictures of retail prices – with online information from over 30,000 e-commerce websites.

As the below graph shows, the Chinese numbers were broadly tracking that of the official figures before the last data release. Since then Premise has noted a strong lift in food inflation, which has significant ramifications for the direction of monetary policy in the world’s second largest economy.

If the numbers are accurate, policy easing may be off the agenda for a while and signs of weakness in the economy will be harder to address.

Chinese food inflation: Black line represents Premise data, blue line indicates official government figures. Source: Premise.  

Premise, which currently has teams in 29 cities including Sydney, Gold Coast and Melbourne, only launched its daily statistics offering last week, but its founders have been working for two years to develop the systems for collecting and analysing inflation.

It already has attracted the attention of Google, through the financial support of its venture capital firm Google Ventures. It has also received backing from venture capital firms Harrison Metal and Andreessen Horowitz, the latter is well known for its successful investments in Facebook, Skype, Groupon and Twitter.

Google and Andreessen aren’t the only big names involved, with Alan Krueger – former chairman of President Obama’s Council of Economic Advisers – serving as an advisor alongside Google’s chief economist Hal Varian.

Since last week’s launch it has seen “a steady flow of inquiries”, with businesses and policymakers interested for a simple reason: the promise of faster, more timely and more accurate data.

“We founded Premise in 2012 because existing mechanisms of econometric data gathering are insufficient to meet the policy, trading, relief or business strategy challenges posed by an era of unprecedented economic and social volatility,” is how Soloff explained it last week.

Premise’s ability to offer immediate insight may even help sooth volatility.

Wednesday, for instance, the Aussie dollar jumped half a cent directly after the release of quarterly inflation figures. For all the talk of a forward looking market, that is a fairly backward facing adjustment. If you had daily inflation stats, however, the dollar wouldn’t be as susceptible to such wild gyrations.

For the time being Premise is directing its resources toward food inflation and food security analysis, but it does expect to branch out into new areas.

“We see a number of opportunities and will definitely add to our offerings,” Soloff told Business Spectator when asked about the future direction of the business.

“This is a vast undertaking with all kinds of implications for how large organisations and individual citizens understand their environments.”

Indeed, the group’s approach to economic data collection should prove a gamechanger. If not on its own, then through the new entrants to the data collection sector that it encourages.