Typically, inflation is measured by the Consumer Price Index (CPI), which tracks the rise and fall of prices of products of daily use. But how does one come up with a reliable inflation tracker in the age of online shopping, with prices varying from one online seller to another and significantly from brick-and-mortar outlets? Should a true inflation index not track online prices too?
Tech company Adobe, which tracks billions of daily digital transactions through its e-retail software, has undertaken a Digital Economy Project that seeks to gauge where the US economy is headed, by tracking real-time online prices of over a million goods. With the help of economists Austan Dean Goolsbee, former chairman of Obama’s Council of Economic Advisors, and Peter Klenow, professor at Standford University, Adobe has come up with a Digital Price Index (DPI), which, alongside the CPI, will map inflation better.
E-commerce constitutes 7 per cent of the US’s 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 is derived from mapping product prices at retail stores, in addition to consumer surveys 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, Gaffney says, is that new products don’t get into that sample because of the four-year base. This leads to 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 that hit the market less than a year ago. For instance, CPI data do not cover tablets, but Adobe’s DPI shows a deflation of 21.1 per cent on the product.
Tracking buying behaviour The digital data, according to Gaffney, also give a level of granularity that is lacking in the CPI numbers. 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 the Substitution Effect — the replacement of one product by another. This is something 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 your buying behaviour changes. For example, in the last four years, you might have married and had a child, and this impacts your consumption pattern. It’s very hard for governments to track that.”
The first set of findings of Adobe’s DPI show variations from the CPI. For instance, while the CPI reported 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 per cent respectively. Right now only mapping the US, Adobe will take its Digital Economy Project to other countries. “To start with, we will take it to English-speaking, digitally advanced countries such as Australia and the UK,” says Gaffney.
It’s early days, but as the Digital Economy marches on Adobe’s DPI could add yet another dimension to the inflation reporting debate raging world over.
Economist Laveesh Bhandari, founder of Indicus Analytics (this was sold to Nielsen), which used to track marketing data, says a digital price index is simple and do-able even in a country like India.
“Of course, it has more relevance in the US, but it’s useful in India too. It’s something that the government should be incorporating,” he says.
The writer is in Las Vegas at the invitation of Adobe.