Mar 23, 2017 - Technology

How Adobe stumbled upon a new way to measure inflation

Ina Fried

Data: Adobe; Chart: Andrew Witherspoon / Axios

For years, economists have relied on the Consumer Price Index as a proxy for the rise in inflation seen by average American households. It's made up of some 80,000 prices in 200 categories.

Adobe thinks it has a more modern approach that can surface the data — and therefore spot inflation trends — much faster. Dubbed the Digital Price Index, it draws on the tons of data that the company gets from online retailers that are part of its digital marketing cloud. It gets pricing data for 2.5 million distinct goods.

The idea to create the index occurred to Adobe after looking at the amount of holiday pricing data it had after the holiday season two years ago.

"We realized we had something no one really has been ever been able to do," Adobe principal analyst Tamara Gaffney told Axios.

The amount of data also means Adobe can break down the information on a state by state basis, whereas the CPI doesn't get more granular than regions. And it can release the data in a fraction of the time it takes the Bureau of Labor Statistics to compile the CPI.

Adobe's index has its limitations to be sure. First off, it's focused largely on digital transactions. That's mostly online commerce, but also includes things like groceries when a customer orders online. Adobe says the DPI probably covers 20 percent of spending today but could eventually address 75 percent of the categories covered by the CPI.

The DPI itself is only a little over a year old, so for now it's really more useful to see month-over-month shifts than to monitor long-term trends. Over time, though, Adobe hopes to take the pricing index further, even to go international, providing an opportunity to directly compare global pricing trends.

So what does the data show: For December through February, Adobe saw inflation rise for the third consecutive month -- the first time in more than three years that has happened, although prices are still down year over year.

The government's CPI shows 0.1% overall inflation for February across all categories. In comparison, Adobe's DPI shows 0.4% inflation across the categories it covers.

Where the CPI and DPI show similar trends: The CPI shows 0.3 percent inflation in its food at home category whereas the DPI shows 0.4 percent inflation in February for groceries. Nonprescription drugs and pet products were other categories where the two indices saw similar pricing trends.

Where they differ: When it comes to appliances, the CPI showed 0.4 percent inflation in February, while Adobe's index saw 1.3 percent deflation. Adobe attributes the difference to the fact that it adjusts for the number of units consumers purchase of each product, whereas the CPI uses only prices across product categories.

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