For one thing, the gauge does not take into account rapidly growing e-commerce sales. The labor-intensive nature of the index — sending people to check on prices in stores, consumer surveys — means that the indicator must exclude key categories like food and energy, because prices for these products rapidly change.
That’s what makes Adobe’s newest project so compelling. The San Jose software giant has developed a Digital Price Index, which tracks billions of online transactions involving 1.2 million products like electronics and groceries. The project has won the backing of prominent economists like Austan Goolsbee, a former top adviser to President Obama who chaired the Council of Economic Advisers.
“I would think policymakers like the Federal Reserve would care a great deal about what’s happening to prices in real time,” Goolsbee told reporters during a recent conference call.
The Federal Reserve uses the Consumer Price Index to help monitor inflation. Twice a month, the government sends people into stores to check on the prices of about 80,000 items. The feds update the basket of goods every four years through consumer surveys.
If prices are rising too fast, the Fed will raise interest rates to make borrowing money more expensive, an act that cools the economy.
But such economic data, including gross domestic product and unemployment figures, is outdated the moment the government releases it, because economic conditions can rapidly shift. As a result, the economic forecasts that policymakers develop using this data often prove to be wrong. The Federal Reserve staff continued to predict that the U.S. economy would grow around 3 percent in 2008, at the height of the Great Recession, even as the housing bubble burst and the American economy plummeted 8 percent.
“We’re living in a world where we use incomplete, flawed data to make our forecasts,” said Tara Sinclair, an associate professor of economics at George Washington University who specializes in forecasting.
But over the past few years, software firms that can quickly monitor, track and analyze data as it unfolds have been stepping into the void. The result has been more relevant, detailed information that ultimately produces better forecasts, Sinclair said.
“We’re really at a moment of a huge paradigm shift,” said Sinclair, who also serves as chief economist for job website Indeed. With enough lead time, “we can not only predict but possibly prevent a recession.”
To develop its first digital price index, Adobe compiled and analyzed 8 billion U.S. website visits and 1.4 million products from January 2015 through February 2016, using marketing software that Adobe rents to many of the top 500 U.S. retailers.
Among some of the more interesting insights from the Adobe data: Prices for electronics during this period fell by 10.4 percent because of lower costs of manufacturing, technology advances and retailer discounts. The Consumer Price Index doesn’t break out electronics as a category, but reports deflation of 7.1 percent for computers and 14.4 percent for televisions.
Adobe found that grocery prices rose 0.7 percent while the government’s index said that prices fell 0.4 percent.
“The data is much more real-time and integrated,” said David Bell, a professor of marketing and e-commerce at the University of Pennsylvania’s Wharton School. “This is about ‘nowcasting’ versus ‘forecasting.’”
Don’t expect the digital price index to replace the Consumer Price Index anytime soon. E-commerce still only makes up about 7 percent of total U.S. retail sales. And though the Consumer Price Index may rely on more conservative methods, Sinclair says the indicator still provides a wealth of historical data to draw upon.
But it might not be too hard to imagine a future when a digital price index leads the evening newscasts. E-commerce sales are growing at a double-digit pace every year as more Americans shop on the Internet.
We’re going to get to a point where prices for products sold online will determine the inflation rate. And since companies like Apple are introducing products at an even faster clip, we’re going to need a way to see the impact of innovation on the cost of consumer goods and services.
©2016 the San Francisco Chronicle, Distributed by Tribune Content Agency, LLC.