The Federal Reserve has been perplexed as to why consumer prices are not increasing at a faster rate, given their super-easy monetary policy of the last few years. Traditional economics tells us that an economy with full employment (which the US essentially has) should experience upward pressure on wages and, subsequently, consumer prices – the so-called Phillips Curve effect. But could the lack of acceleration in consumer prices be caused by more structural issues?

Take the internet for example. It’s impossible to imagine a world without the internet now, but only 25 years ago that was the reality. You actually had to physically go to a shop to buy stuff and, if you wanted to know about something, you would look it up in a physical book called an encyclopedia. There is absolutely no doubt that the internet has been a driving force in improving efficiency and productivity.

Then, there is the actual cost of using it. Costs of internet usage have fallen for years, but now that trend is, once again, picking up speed. Internet providers have been engaging in price wars in an effort to pick up market share. AT&T, Verizon, Sprint and T-Mobile USA have all been falling over themselves to slash prices and give customers “unlimited data.” As our chart shows, this has resulted in wireless prices collapsing at as fast a pace as they were at the start of the millennium.

The Federal Reserve takes the view that this fall in the cost of wireless is temporary, but as the chart displays, prices have fallen for almost the entire time from 1999. Clearly, there is a structural aspect to this. The internet (data) has become so fundamental to life in the 21st century that it has become a utility like water and heating.

Finally, the benefits of actually using the internet are becoming more apparent. Adobe, the computer software company, has created a Digital Price Index which tracks online shopping patterns in real-time. In their most recent report they highlighted the difference between shopping online versus going to the store. As the report states,

“Looking at prices between July 2015 and July 2017, we found that the purchasing power of a dollar has increased to $1.06 online, and only $1.03 elsewhere; if consumers shifted all their spending online for the same products they purchased offline in 2016, they’ll save about $2.2 billion vs spending offline. And, according to the numbers, that number will only increase.

In other words, your dollar goes further online than off, and as online shopping proliferates even more, that trend will continue. The Adobe report also shows that online prices are falling faster than offline prices for items from televisions and jewelry, to apparel and sporting goods.

The advent of the internet for the masses has been an event of epochal significance. One of the most important aspects could be that price expectations are now structurally lower.

 

 

 

 

 

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