Why Tech & Broadband Prices Have Avoided Surging Inflation

Why Tech & Broadband Prices Have Avoided Surging Inflation
(AP Photo/Rick Rycroft)

President Joe Biden rightfully focused the economic portion of his State of the Union address on jobs, inflation, and the need to boost investment at home. He rightfully claimed credit for more than 6 million jobs generated on his watch, and the steps his Administration is taking to cut costs for Americans.

But inexplicably, Biden did not cite some real economic success stories. On the job front, the most consistent job creator since the pandemic started has been the digital sector, with employment in the tech, broadband and ecommerce industries up by 1 million jobs since January 2020. 

And even as prices for traditional goods like energy and autos have skyrocketed, digital economy inflation has remained almost non-existent. Two examples: the price of internet access services fell 1.3% in the year ending January 2022, according to the latest producer price report from the Bureau of Labor Statistics, released February 15. And the price of data processing fell by 0.3% over the same stretch.

Meanwhile the overall consumer price index rose by 7.5% over the same stretch. The producer price index for final demand rose by 9.7%.

This lack of inflation in the tech, broadband and ecommerce worlds is a stunning phenomenon that deserves a lot more attention from the White House, which is debating internally whether to blame rising prices on corporate greed. Why are these digital companies holding the line on inflation — at least so far — when old-line industries are bingeing on double-digit price increases? After all, consumers can spend their dollars on digital goods and services just as easily as traditional goods, especially during the era of Covid-19.

One key fact is that many old-line companies — in particular, energy and auto companies — cut back on capital spending during 2020 and 2021, while enterprises in the tech, telecom and ecommerce sectors kept investing at the same or higher rates.

Energy companies sliced spending on petroleum and natural gas exploration and wells by 40% during the pandemic, setting the stage for explosive price increases in oil and gasoline. General Motors and Ford, mentioned positively by Biden, actually reduced capital investment by more than 20% in the pandemic compared to the previous two years, contributing to the rapid rise in motor vehicle prices when American consumers tried to spend their money.

Taking the long-term perspective, productive capacity in non-tech manufacturing has been steadily shrinking since the 2008-2009 financial crisis, and is now 10% below 2007 levels. By comparison, real consumer spending on goods is about 50% higher. This mismatch has left American consumers far more vulnerable to any disruptions in global supply chains. 

By contrast, digital companies adopted a pro-investment strategy, spending heavily on creating new capacity and deploying new technology. PPI’s Investment Heroes report from last year showed that eight out of the top 10 companies in terms of domestic capital spending in 2020 — Amazon, Verizon, AT&T, Alphabet, Intel, Facebook, Microsoft and Comcast — were in the tech, ecommerce, and broadband sectors. This strong investment performance continued into 2021 as well, based on corporate reports.

The additional digital economy capacity means that digital price increases have been restrained compared to the rest of the economy. For example, the producer price of cable and other subscription programming was down 1.8% in the year ending January 2022. The consumer price of wireless services was down by 0.5%, as telecom companies devoted billions to building out 5G networks and buying additional spectrum. 

On the tech side, the decline in the price of data processing reflects investments by companies like Amazon, Alphabet, and Microsoft in building out cloud capacity. Additionally, producer prices charged by software publishers only rose by 1.1% over the last year, Prices for advertising sales by internet publishers and web search portals are rising at a 3.5% pace, which is still less than half the overall inflation rate. Relative to January 2015, prices for advertising sales by internet publishers and web search portals are down by 16.9%.

And then there’s online shopping, where companies like Amazon and Walmart are spending billions of dollars to vastly boost their capacity to move goods quickly from sellers to consumers. Here it’s important to focus on the margin charged by retailers, which is the difference between the selling price to consumers and the cost to the retailer of acquiring the products.

Over the past year, ecommerce margins have risen by only 1.1%, as reported by the BLS. By contrast, margins in the overall retail trade industry rose by 11.3%. General merchandise store margins, including department and warehouse stores, rose by 10.3%, while the margins of motor vehicle and parts dealers rose by almost 25%. These large increases could reflect the higher cost of running brick-and-mortar establishments during a pandemic, or they could reflect higher profits.

What does this mean for the Biden Administration’s economic and political inflation-fighting strategy? A crucial part of the inflationary context is weak investment by companies in traditional industries that has impaired domestic productive capacity. As the White House looks towards the midterm elections and beyond, the focus should be on those sectors where domestic investment has lagged, especially given the potential for further supply chain disruptions from the conflict with Russia.

Meanwhile, the White House should consider whether attacks on tech and broadband companies are counterproductive in the fight against inflation. A “corporate greed” message may not resonate with voters if digital companies are investing in America while holding down price increases.

Dr. Michael Mandel is Vice President and Chief Economist at the Progressive Policy Institute.

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