Gauging inflation dynamics using online pricing data
The growth of e-commerce has facilitated inflation tracking on a daily basis, namely from aggregating online pricing data. Moreover, the ubiquity of e-commerce in-itself is changing aggregate inflation dynamics. We believe product pricing datasets have a particularly potent use case in generating early inflation signals in opaque markets, such as LatAm, where official statistics are challenging to obtain. In this report, we review the academic literature that examines the behavior of online prices and its response to aggregate national shocks. We also outline where to find alternative sources of inflation data.
STUDIES ON E-COMMERCE PRICE DATA AND INFLATION DYNAMICS
A recent paper by Alberto Cavallo, studies the influence that large online retailers have on the behavior of inflation. Cavallo’s research finds that 1) the frequency of price changes is increasing, 2) prices across locations are becoming more uniform, and 3) a combination of these factors can increase the sensitivity of prices to aggregate national shocks. Such one-off shocks include oil price swings, nominal exchange rate fluctuations and the imposition of import tariffs. The study analyses datasets from the Billion Prices Project (BPP), which is aggregated from large multi-channel retailers. The analysis finds that the aggregate frequency of price changes in multi-channel retailers has been increasing for the last 10 years.
The paper builds on a growing body of literature that studies how e-commerce is affecting aggregate prices, which finds that online marketplaces exhibit far more price flexibility and exchange-rate pass-through than prices found in CPI data. These papers discuss the increasing ability for shoppers to compare prices online and the use of algorithmic pricing technologies by large retailers as leading causes for the intensification of price competition, which results in more regular changes to prices for major retailers. Many experts have pointed to these changing dynamics as an explanation for slow inflation in economies like the UK and US. Economists have long attributed the UK’s sluggish rate of inflation to the ‘supermarket price war’ – as the largest grocery retailers continue to slash prices to undercut the competition.