Will the combination of high cost increases and low digital inflation spur reluctant companies to digitize?
One of the pleasant economic surprises in recent months has been the low rate of inflation for digital goods and services, compared to the overall inflationary surge. The latest producer price report, released November 15, shows that a basket of digital goods and services (described below) had a median year-over-year price increase of 1.9%. By comparison, the overall year-over-year price increase for final demand, less food and energy, was 6.7%.
We wrote about this big gap between “New Economy” digital inflation and “old economy” inflation in a December 2021 blog item. In June 2022, leading economic statistician Marshall Reinsdorf wrote a paper for PPI examining the continued slow rate of price increases for most digital goods and services.
The growing gap between overall inflation and digital inflation means that the relative price of digital goods and services is falling. To put it another way, in the low-inflation era that preceded the pandemic, many companies enjoyed the benefit of low costs without having to make expensive and potentially risky investments in digitizing their operations.
Now that easy period is over. Companies are looking at technology as a way out of their high-cost trap. Business spending on software, computers, and communication gear hit an all time high in the third quarter of 2022. The layoffs at companies such as Amazon and Facebook notwithstanding, there’s no evidence that companies in the aggregate are cutting back on tech investment. A survey from Gartner predicts a 5% gain in tech spending in 2023.
Nobody likes inflation. But there may be a silver lining if the threat of rising costs forces companies to take digital steps that should have come years ago.
Our price index of digital goods and services includes:
Bundled access services
Cable and other subscription programming
Communications equipment mfg
Computer & peripheral equipment mfg
Data processing and related services
Electronic and mail-order shopping services
Internet access services
Internet publishing and web search portals
Semiconductor and other electronic component mfg
Software publishers
Video programming distribution
Wireless telecommunications carriers
Information technology (IT) technical support and consulting services (partial)
