Measuring price rise in the age of online shopping

Typically inflation is measured by looking at the Consumer Price Index (CPI) which tracks the rise and fall of prices of products we use daily. But as more and more consumers move to online shopping, where prices vary significantly from offline rates, shouldn’t that be added to the inflation calculation too?

Tech company Adobe which tracks billions of digital transactions daily through its e-retail software has undertaken a Digital Economy Project that ambitiously seeks to find out how the US economy is moving by analyzing real time online prices of over a million products. With the help of economists Austan Dean Goolsbee, former chairman of Obama’s Council of Economic Advisors and Peter Klenow, professor at Standford University, it has come up with a Digital Price Index (DPI) that added to the traditional CPI will help map inflation better. In the United States, ecommerce constitutes 7 per cent of GDP and there are guesstimates that 30 per cent of purchases in some categories are now online.

Tamara Gaffney, principal analyst at Adobe Digital Index explains how the CPI in the US is derived from mapping product prices at retail stores combined with consumer surveys that are administered every four years. The Bureau of Labour Standards in the US does incorporate online pricing too though there is a time lag in reporting. But the gap in this methodology, says Gaffney, is that new products don’t get into that sample because of the 4-year base. This leads to some skews - especially in electronic items. The Adobe DPI data shows that a whopping 80 per cent of monthly online spend for electronics in the US is on products introduced less than a year ago in the market. For instance, the CPI data does not cover tablets, but Adobe's DPI shows a deflation of 21.1 per cent on the product.

The digital data, according to Gaffney, also gives a level of granularity that is lacking in the CPI data. You can have a meat price index, a coffee price index and so on. It also shows how when prices go up, buying behaviour changes leading to substitution effect - replacing one product with another. This is something that economists have been trying to identify but have not had great data on.

Says Gaffney, “One of the factors we are able to demonstrate is that when your personal situation changes how your buying behaviour changes. For example, in the last four years, you might have married and had a child, and this impacts your consumption patterns. It’s very hard for governments to track that."

The first set of findings of Adobe’s DPI do show variations from the CPI. For instance, while the CPI reports 7.1 per cent deflation for computers and 14.4 per cent for TVs over the last year, the DPI finds this to be 13.1 per cent and 19.4 percent respectively.

“Our data is more digital hence covers the more affluent sections who also may be buying more branded products,” admits Gaffney. But she points out that these may be missing out in the government’s surveys.

Right now only mapping the US, Adobe will be taking its Digital Economy Project to other countries as well. Says Gaffney, “ To start with we will take it to English speaking digitally advanced countries such as Australia and the UK and work with local economists to create a locally relevant model.”

It's early days yet, but as the Digital Economy marches on Adobe's DPI could add yet another dimension to the inflation reporting debate raging currently world over.

(The writer is in Las Vegas at the invitation of Adobe)

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