Online prices are showing signs of deflation

Government data puts inflation at about 1 percent, and even that anemic number may overstate the true level of price growth.

Billions of online transactions are tracked on a daily basis by Adobe and show that deflation is rampant across several consumer categories. Prices are falling fast in the Adobe Digital Price Index, which measures 80 percent of all online transactions from the top 100 U.S. retailers.

The consumer price index is calculated on a monthly basis by surveying the costs of about 80,000 items, while the DPI tracks 2.2 million products every day. Online commerce makes up almost 8 percent of all retail sales, according to the Census Bureau.

Deflation in the DPI in June was stronger for discretionary spending categories like electronics and sporting goods than essentials like groceries and medical supplies, said Mickey Mericle, vice president of marketing and customer insights at Adobe. That could be a sign of reduced spending on nonessentials by cash-strapped Americans.

"When people are not seeing real wage-growth increase, what they're doing is maintaining spending on the essentials while cutting nonessentials," Mericle said. "This could be a demand issue where people are not spending enough on things like electronics, so vendors are pushing down prices."

Adobe's Digital Price Index has several advantages that make it a good complement to the government's CPI data. Its larger sample size means it had a lower margin of error. The data are also adjusted for the quantities of each item sold, reflecting the change when customers switch from one product to another due to price.

That provides more meaningful data than unadjusted indexes, said Austan Goolsbee, professor of economics at the University of Chicago's Booth School of Business and an advisor to the project. It means that if beef gets more expensive and people start buying chicken instead, the index will reflect both the change to the prices and different buying habits.

"Economists have known that this is a problem with price indices from the very beginning," Goolsbee said. "We couldn't observe how they respond to prices or the quantities they're buying, so they would have to do a one-time survey for the quantities and watch the price of those things."

"The latest technology will get picked up, but the CPI would take years to include that in their sample, if they do at all." -Luiz Maykot, Data Science Analyst, Adobe Digital Insights

The DPI is also more sensitive to changes that could be missed by the monthly CPI, as bankruptcies and one-day sales events may not be factored into the survey data, but are caught in the daily index. New products like tablets can also be measured, but weren't even in existence the last time the CPI was reformulated.

"In some categories, we show more inflation than the CPI, and one of the reasons could be that we have newer products," said Luiz Maykot, data science analyst at Adobe Digital Insights. "The latest technology will get picked up, but the CPI would take years to include that in their sample, if they do at all."

There are some CPI categories that aren't currently measured in the DPI.

Housing, for example, makes up about 40 percent of the CPI by weight, but isn't currently a DPI category. (Adobe tracks job and housing data separately by measuring searches on relevant websites.) Maykot said that Adobe plans to eventually expand the index so it can be compared to the CPI data across most consumer goods and services.

Tablets, televisions and appliances showed the most deflation in the June DPI figures, while there was inflation in international airfares, nonprescription drugs and toys. London flights and hotels were the exception with significant deflation, likely due to the recent devaluation of the pound relative to the dollar following the Brexit vote.

Even in its current formulation with limited categories, the DPI suggests that current measures of inflation may be overblown. Deflation may be exerting a stronger pull on our economy than the CPI indicates.

"It strongly suggests that direction, with the caveats of the components it's able to track," Goolsbee said. "It's certainly eye-opening."