Online Price Index with Automated Product Replacement : The Closest-Match Approach

Current methodologies to calculate a consumer price index (CPI) with online prices have shown an abnormal downward trend. This paper introduces a new methodology that avoids this problem by effectively mitigating the effects of product turnover. The method mimics the decision-making process of specialists that review forced-replacement items at statistical offices, yet is scalable so that price indices can be calculated with thousands of products without manual intervention. The method reflects a change in paradigm for how old and new varieties of products are linked. While the traditional approach looks for a replacement when an item is discontinued, the closest-match approach searches for a comparable item every time a new product enters the market. The price index presented in this study is remarkably similar to the traditional CPI for every country in the sample, namely Germany, the Netherlands, Spain, the United Kingdom, and the United States