Wow, Google “top economist” is making a big news splash today with the announcement of their GPL – Google Price Index” (see CNBC, Orbit, or tens of different opinion sites).
One reason being that it’s different than current inflation indexes, and second that it trends downwards (ugh!!), but I do not think we should use it for demonstrating the real world economy is trending down.
Being an old timer of the digital space it definitely makes sense to use the web for gathering more data (faster, better, easier to build trends etc.); but we have to keep in mind that it is a space different from the real world out there, and some phenomena get amplified or skewed.
ecommerce covers only a subset of products and goods; more, even for goods highly exchanged in the digital space, only a small proportion of the total transactions is digital, and it may not represent a change up or down of their total market.
GPI may not be a good enough index.
What I like is Varian’s little anecdote: he was searching online for the price of a specific good, and got a wide variance of prices; there was room for a new index.
The way I react to the story is that there is *still* a big variance in prices even in the digital space, so consumers even if they’re getting wiser and shop for best prices, may not be able to get best conditions.
Or that the wise shoppers use online to get better (if not best) prices, and online is a space that enables faster process optimization and these consumers have an edge vs. the traditional brick & mortar folks.
So? well, there is still room for building new shopping models (Groupon Woot etc. give you a hint?); and well, digital space is an efficient way to improve the overall effectiveness of an economy.
On the down side: online is not providing its better opportunities consistently across social or demographic groups.
Now, is that to say that if we get all more efficient and prices decline, this generates a economy-wide negative effect, determines a deflation? of course not. Lower prices can represent higher volumes, lower costs eg higher margins, and so forth. But to say that GPI shows the economy is trending down makes bigger news.