New Economic Indicator Measures Inflation Across the Digital Divide
The world is about to get a much clearer picture of inflation and employment trends thanks to three new digital economic indicators that will track everything from online retail and housing prices to job search activity.
The Digital Price Index (DPI) is part of a suite of three new economic indicators developed as part of our Digital Economy Project — which also includes the Digital Housing Index and the Job Seeking Index. All three are designed to quantify Internet-based activity.
Unlike the well-known Consumer Price Index (CPI), the DPI utilizes near real-time price information. Drawing upon data from the Adobe Marketing Cloud, the baseline for the new index was established by analyzing 1.2 million online electronics and grocery purchases across four billion website visits. New product categories will be added on an ongoing basis over the next 18 months.
Reporting Real-time Trends
Professors Austan Goolsbee and Pete Klenow, two world-renowned economists, collaborated with Adobe on the development of the DPI. Professor Goolsbee is a professor of economics at The University of Chicago’s Booth School of Business and former chairman of the Council of Economic Advisers for President Obama; and Professor Klenow is a professor of Economics at Stanford University and former senior economist at the Federal Reserve Bank in Minneapolis.
The economists helped Adobe implement the Fisher Ideal Price method –considered the gold standard for measuring inflation. With the massive amount of data from Adobe’s Marketing Cloud, the Fisher method is best for tracking price fluctuations from digital purchases because it accounts ever-shifting consumer preferences.
“The CPI provides observations on a wide array of categories, but has always struggled to take into account the introduction of new goods,” says Professor Goolsbee. “By combining actual data from previous and current transactions, Adobe has opened the door to quickly and accurately identifying the shifting patterns of consumer shopping and prices in the U.S.”
On the micro-level, the DPI will, for example, measure when online shoppers find better prices from a competing product if the price of an item suddenly increases. “Due to the dynamic nature and direct measurement of this data, we’re able to more quickly identify pricing trends, inflation, and more,” says Tyler White, senior manager for the Adobe Digital Economy project.
Bringing Inflation Tracking into the Digital Age
By contrast to the DPI, the U.S. Bureau of Labor Statistics relies on Census Department surveys updated every four years for each product category. The government also employs an army of data collectors in the field in order to provide updates to the CPI — which is based on 83,000 products across more than 200 categories. The precursor to the modern CPI began in 1919, but traces its roots back to the 19th Century.
Today, tracking bricks and mortar pricing in an increasingly digital economy misses an important inflation indicator. For example, according to Adobe’s DPI, prices of desktop computer declined by 13.7 percent between January 2015 and January 2016. But, for the same period, the CPI reported an average price decline in its Personal Computers and Peripheral Equipment Category of just 7.1 percent.
“The DPI will fill a gap in traditional inflation reporting,” says Luiz Maykot, one of the Adobe analysts who helped create the DPI. “We think this will become an important tool for assessing the state of the economy, and for accurately measuring both micro- and macro-economic trends.”
Better Insights into Housing and Employment
In addition to the DPI, the new initiative includes the Digital Housing Index (DHI) and the Job Seeking Index (JSI), both of which use traditional indexing methodology.
The DHI provides a completely new dataset by aggregating online real estate purchasing and rental trends across multiple channels, ranging from websites to mobile apps. Based on data from more than two billion housing search sites, the DHI shows a 20.5 percent increase in the number of active online buyers and renters, between February 2015 and February 2016.
The JSI uses aggregated annual data from more than one billion visits to U.S. employment websites and company career pages. Based on the results, online job seeking activity declined 10.3 percent between February 2015 and February 2016.
The three new indices are just the beginning of what’s on tap. Next month, the Digital Index team plans to add airline ticket and hotel pricing to the DPI.
Beyond that, the DPI will gradually expand to include more of the categories covered by the CPI. Any product being purchased online can ultimately be tracked. If information is power, then the DPI is putting that power into the hands of everyone in the marketplace.