Challenges for measuring inflation in a digital world from a monetary policy perspective

Apart from having been a major driver of subdued inflation developments in most industrialized countries in the past 10–15 years, recent key megatrends in the retail industry, such as globalization and digitalization, also pose a number of new challenges for measuring inflation. This article discusses possible effects of growing Internet use on prices, inflation and official price statistics. There is some evidence that the growing importance of e-commerce in recent years has had a dampening effect on both online and offline prices, although this effect is likely to be small and only temporary until the spread of the internet has stabilized. To account for the changing consumption habits resulting from web retailing, the methods and procedures for inflation measurement have to be adjusted to the new conditions. Systematically collecting data from online retailers (through web scraping) in addition to monitoring prices at brick-and-mortar stores and expanding monitoring to include smaller towns and rural areas would reflect new consumption habits and improve the representativeness of the price index. The use of scanner data directly obtained from retailers, furthermore, would allow for a joint analysis of prices and quantities sold, which in turn helps reduce the substitution bias present in conventional price statistics. At the same time, a long-standing issue remains to be solved in inflation measurement: Although the costs of owner-occupied housing account for a considerable share of the total cost of living of households, they are still not included in the consumer price indices of European countries due to methodological complexities. In this respect, experimental evidence indicates that – under normal circumstances – including these costs in official price statistics will most likely not change the euro area inflation figures by much.