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Online shopping used to be immune to inflation. Not anymore

Through economic booms and busts, e-commerce has long been virtually immune to inflationary pressures. Average online prices dropped every year between 2015 and 2019.

But Covid ended that once-reliable trend.

Online prices jumped 3.1% year-over-year in July, according to a report released Thursday by Adobe. Out of 18 categories captured by the Adobe Digital Economy Index, all but six saw price jumps last month. The price gains were most dramatic in July for online clothing, over-the-counter drugs and sporting goods.

“Pre-Covid, I don’t think there was any inflation. It was exclusively deflationary,” Austan Goolsbee, the former Obama adviser who helped Adobe develop the index, told CNN.

This isn’t a one-month glitch. Online prices began rising soon after the pandemic erupted in March 2020 and that trend has continued.

Adobe found that online prices rose by 2.3% during the 12 months ending in June and gathered momentum in July.

That marks a sharp reversal from the pre-Covid historical trend. Between 2015 and 2019, online prices dropped by an average of 3.9% every year.

Why it matters

Goolsbee said the fact that online inflation is hotter-than-normal suggests the next few monthly inflation reports released by the US government may not show inflation is cooling off just yet. That would be a disappointment to consumers, not to mention the Federal Reserve, White House and the many economists arguing these price spikes are just a temporary phenomenon.

“The Fed should absolutely be paying attention to what’s happening online,” said Goolsbee, who added that he remains on “Team Temporary” when it comes to the inflation debate.

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Online inflation is a big deal because falling e-commerce prices are often cited as a major reason inflation should eventually return to healthy levels.

It’s long been cheaper to buy stuff online than in local stores. That’s partially because shoppers can quickly and easily find what sites are offering the best deals. Consumers don’t even need to leave their couch to bargain hunt.

Yet in July, annual prices rose sharply for online apparel (15.3%), nonprescription drugs (5.7%) and sporting goods (3.5%), Adobe said. Other categories returned to their deflationary trends. In July, online prices dropped for computers (-7%), toys (-4%) and office supplies (-2.5%).

But even in areas where prices dropped, they are not doing so as fast as usual. Adobe said online prices for electronics fell 2% during the 12 months ended July. That’s a sharp contrast from the 2015-2019 historical average drop of 9% in online electronic prices.

Adobe has been tracking online prices monthly since 2014, but it only began releasing numbers on e-commerce inflation last month. Previously, Adobe shared that data almost exclusively with government agencies and academics.

‘Everything is going up’

So why has inflation infiltrated online shopping?

First, e-commerce doesn’t exist in a vacuum. It only makes sense for online prices to reflect the broader inflationary environment.

“The price of everything is going up,” Goolsebee said.

Government-measured inflation, which include online shopping, has been scorching lately. US consumer prices spiked by 5.4% over the 12 months ended in July. That tied with June for the fastest annual consumer inflation since 2008.
Secondly, Adobe blamed online inflation on supply chain bottlenecks. That’s the same challenge that has contributed to delayed furniture shipments and shortages in recent months of everything from steel and lumber to computer chips. After getting sidelined by Covid, supply is having serious trouble catching up to surging demand.

Demand is another factor here. The pandemic shuttered brick-and-mortar stores and made some shoppers nervous about going to grocery stores. That drove even more demand to online shopping — a category that was enjoying explosive growth long before Covid.

The inflation blame game

Fed Chairman Jerome Powell has consistently said inflation is likely “transitory,” cooling off as the economy reopens. He’s pointed to the dramatic rise and subsequent collapse in lumber prices as evidence. Powell has, however, acknowledged there is a risk the Fed (and investors more broadly) are wrong and inflation hangs around for longer than anticipated.

The CEOs of BlackRock (BLK) and JPMorgan (JPM) have recently said they don’t think inflation will be temporary.
The inflation debate has become a political football, with Republicans attacking Democrats for rising prices of groceries and back-to-school supplies.
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“Democrats’ reckless economic policies have caused a massive spike in prices, and parents across the country are feeling the sting as they send their kids back to school,” NRCC Chairman Tom Emmers said in a statement Wednesday.

However, as CNN has previously reported, it’s misleading to suggest that Covid-19 stimulus packages are the only reason for rising prices.

Goolsbee, a veteran of the Obama administration, dismissed the inflation attacks and remains steadfast in his belief that inflation will ease soon enough.

“The inflationists have the problem that every time a Democratic president has proposed to do something, they’ve said there is imminent danger of hyper-inflation,” Goolsbee said, pointing to warnings of rapid price hikes caused by the 2009 stimulus package and Obamacare. “They’ve been systematically wrong over and over.”