E-Commerce Might Help Solve the Mystery of Low Inflation

By Patricia Cohen and Jim Tankersley of The NY Times. Excerpts:

"The spectacular growth in online shopping, it turns out, is not only tamping down inflation more than previously thought, but also distorting the way it is measured.

The studies reinforce the views of Federal Reserve officials who see the internet’s increasing influence as a leading suspect in a continuing mystery: why inflation routinely falls short of their 2 percent target, considered the sweet spot for keeping the economy humming without overheating."

"“We don’t have as good measures of the economy as we should, in part because there are many new digital goods and new online channels,” said Erik Brynjolfsson, director of the M.I.T. Initiative on the Digital Economy. “At the same time, digitization of more and more of commerce creates a huge opportunity for much better measurement.”

One opportunity has come from the Digital Price Index, a compilation of data scraped from the web that Adobe Systems recently started collecting.

An analysis of that information by Austan Goolsbee of the University of Chicago and Peter Klenow of Stanford found that prices for goods sold on the internet rose much more slowly from 2014 to 2017 than indicated by barometers like the Consumer Price Index, or C.P.I.

Online prices of personal computers fell by 12.3 percent, for example, but the C.P.I. showed just a 6.9 percent drop. Toy prices online slumped 12 percent, while the C.P.I. put the drop at just 7.8 percent. Online prices for photographic equipment and supplies fell 9.2 percent compared with the 0.6 percent decline registered by the official measure.

The government said on Tuesday that the C.P.I. increased 2.8 percent in May from 12 months earlier, with much of that jump coming from higher prices for gasoline and other energy items. Not including food, energy and housing, which tend to change a lot from month to month, the index was up a much more modest 1.3 percent. The monthly figures are based on a sampling of 140,000 products sold both in stores and online. Adobe’s digital index solely includes internet sales, but the range of products covered is much bigger: 2.1 million transactions every month.

“A lot of what’s in the C.P.I. is not bought on the internet, like health care and housing,” said Mr. Goolsbee, who was also an adviser to former President Barack Obama. But if you compare the same set of goods, he said, “there is massively more deflation” online — by as much as 2.5 percentage points. A deflationary cycle, where prices keep dropping, as has happened in Japan, can mire an economy in decline.

“Prices are going down a whole lot faster than the C.P.I. shows for the same things,” he said.

After all, as bargain hunters know, comparison shopping is a cinch online. The result is that merchants are leery of raising prices. The ease of entering the marketplace, regardless of location, further ratchets up the competition. At the same time, internet retailers can often operate at a lower cost than their brick-and-mortar competitors.

Jerome H. Powell, the Federal Reserve chairman, has called it “the Amazon effect story.”"

"Figuring out just how much of an impact online shopping has had on inflation, however, remains a challenge.

There are several measures of inflation — like the C.P.I., used to calculate cost-of-living increases in Social Security, and personal consumption expenditures (P.C.E.), an index favored by the Fed — and they all try to take account of buying and selling on the web."

"And as e-commerce grows and new products proliferate, some economists argue, the traditional measures have a harder time capturing the full scale of price changes online.

Mr. Goolsbee and Mr. Klenow discovered that new and updated products — from the iPhone X and digital assistant devices to electric bikes and toy monkey Fingerlings — were flooding online marketplaces much faster than estimated.

Putting aside apparel, where designers offer new fashions every season, the research found that 44 percent of the products sold online did not exist in the previous year. And nearly a quarter disappeared from one year to the next."

"Online spending now accounts for 10 percent of all retail spending, and in some categories 50 percent.

This isn’t the first time innovations in shopping have upended pricing structures. Over time, the introduction of the Sears catalog similarly held down prices compared with the small, local stores where people had always shopped, said Mr. Gordon, the Northwestern economist."