Dropbox, Google Drive, and the Consumer Price Index

I was looking at the April CPI this morning, and I got to thinking about Dropbox. I use Dropbox literally 25-50 times a day.  I’m working on a file on my Apple laptop, save it to the Dropbox folder,  and I can be sure that the same file will show up on my PC when I get home.

Dropbox costs me nothing for 2.5 GB worth of storage. More important, I’m getting a valuable service for nothing.

Now comes along Google Drive, which supposedly functions much the same way, and offers 5 GB of storage.  Now, I’m not going to switch any time soon because Dropbox is working fine for me. But a reasonable interpretation here is that the “price” of seamless online storage has fallen.

But where does the fall in “price” of the Dropbox/Google Drive-type service show up in the Consumer Price Index? The answer: Nowhere. Free services such as Dropbox and Google Drive (or Facebook, or Yahoo Mail, or any other Web service without a price) do not affect the CPI, even as their usefulness increases.

This is not a new observation at all (see for example the 2009 working paper “The Broadband Bonus: Account for Broadband Internet’s Impact on U.S. GDP” by Greenstein and McDevitt).

Yet this omission of free online services from the CPI, once insignificant,  has become increasingly important as we spend more and more of our time online. What has the bigger impact on Americans–an increase in the price of “lunchmeats” (2.3% over the past year) or a decline in the price of online storage (arguably down by as much as 50%, though it is probably less )?

That’s a real question, incidentally, not a rhetorical one. We may have reached the point where Internet companies are providing free services that have a higher value than some things we pay for. How we change our economic statistics to reflect this new reality?


Service Sector Inflation Accelerates

Is inflation accelerating or decelerating? It depends on where you look.

The inflation story differs tremendously depending on whether you look at goods or service inflation. Goods inflation is very low and stable–the producer prices for finished goods less food and energy are rising at only 1% per year. 

By comparison, service sector inflation is accelerating.   Over the last few years, the Bureau of Labor Statistics has started reporting producer prices for what it calls “traditional service industries.” These include such services as healthcare, finance, information services, legal, accounting, management consulting,  security guards, employment services, janitors, advertising, and so forth and so on.  Many of these services are mainly bought by businesses, so they don’t show up in the CPI. They also tend to be labor intensive and more domestic.

Which one of these should the Fed be watching?  I’d say that service sector inflation may turn out to be a better indicator of domestic price pressures.