Ecommerce prices are in deflation for the first time in 2 years

Inflation's rise slows

The heat of the summer brought a cool down for inflation.

The Consumer Price Index registered an 8.5% increase on a yearly basis in July, according to the US Bureau of Labor Statistics.

This was down from a 40-year-high increase of 9.1% in June, offering signs that the rapid rise of inflation over recent months may be starting to slow down.

Prices overall were flat month-over-month. But the cooling owed mostly to falling gas prices, which fell 7.7% month-over-month.

That was enough to offset a 1.1% rise in food prices from June to July. Food offers a reminder that inflation is still rising at rates not seen for 40 years. The food index increased 10.9% over the last year, which was the largest 12-month increase since the period ending May 1979.

So-called core inflation, which leaves out the more volatile food and energy indeed, increased 5.9% on an annual basis and 0.3% monthly, according to the BLS. The monthly increase was smaller than April, May or June.

Among consumer goods categories that showed movement, household furnishings prices rose 0.6% after increasing 0.4% in June. Personal care was up 0.4%. Meanwhile, apparel prices fell 0.1% after rising the prior two months.

While the CPI provided some signs that price pressures are beginning to ease, the monthly measure is simply a snapshot. It could show inflation's rise slowing this month, only to tick up again next month. That dynamic was evident from March to April, when a one-month slowing in price increases gave way to a new 40-year high of 9.1% in June. However, falling gas prices that have been observed throughout the summer will buoy hopes that inflation has peaked. However, the CPI offers a reminder that gasoline prices remain 44% higher than a year ago.

The Federal Reserve has taken action to get prices under control with back-to-back interest rate increases of 0.75%, which are unusually large hikes for the central bank. After the latest increase in late July, Fed Chairman Jerome Powell said that it may take months before the effects of the interest rate hikes are evident. Powell has said price stability is the body’s top priority as it seeks to prevent inflation from taking hold within consumer mindsets.

The Fed has said it would take decisions about further increases meeting-by-meeting, and base it on the data that becomes available in the meantime. Before it meets in September to consider any additional action, there will be another CPI release, as well as the July personal consumption expenditures index data, which is the central bank's preferred inflation measure.

Even as inflation begins to come down, it's worth remembering that the conditions it created are likely to remain in the months ahead. On earnings calls to recap the second quarter, public companies in the retail and consumer goods space have detailed outlooks that include continuing declines in consumer demand.

"We are keenly aware of what's happening around us. We anticipate that inflation and the continued softness in consumer spending on goods will persist through the remainder of the year," said Shopify CFO Amy Shapero told analysts on the ecommerce company's earnings call.

​Deflation in the Digital Price Index

Online inflation data from Adobe Analytics showed that ecommerce prices were falling so precipitously that they are entering a deflationary period.

According to the Adobe Digital Price Index, online prices in July dropped 1% year-over-year. This came after a 0.3% increase in June and 2% increase in May. Prices fell 2% month-over-month.

The index, which analyzes one trillion visits to retail sites and over 100 million SKUs across 18 product categories, had previously shown 25 straight months of rising prices. Put another way: deflation is showing up for the first time in two years.

Ecommerce prices fell amid a complicated environment that mixes sagging consumer sentiment, an influx of inventory, deal events around Prime Day and the start of back-to-school shopping season.

Adobe said consumers spent $73.7 billion online in July, which was $400 million less than the prior month. However, Prime Day drove a 20.9% increase in ecommerce spending on a year-over-year basis.

In all, prices fell in 14 of the 18 categories tracked by the index on a month-over-month basis. But on a year-over-year basis, prices increased in 11 of the 18 categories. Here are a few highlights:

• Electronics, which hold the largest share in ecommerce saw prices fall 9.3% year-over-year, marking a larger increase than May and June. Toy prices also fell 8.2%.
• Apparel prices fell 1% year-over-year, marking the second consecutive month where prices fell. Until June, apparel posted 14 straight months of price increases.
• Food costs led to rising prices in this index, as well, driving the highest increase in any category. The Digital Price Index showed a record 13.4% increase in food prices year-over-year.

“Wavering consumer confidence and a pullback in spending, coupled with oversupply for some retailers, is driving prices down in major online categories like electronics and apparel,” said Patrick Brown, Adobe’s VP of growth marketing and insights. “It provides a bit of relief for consumers, as the cost of food continues to rise both online and in stores.”

The full chart showing pricing category changes is below

Grocery inflation reaches record high

With prices continuing to rise, it's worth clicking into specific categories. That's what market research firm Numerator did in a report for July.

For one, it detailed grocery inflation, which is distinct from the CPI's "food at home" and "food away from home" indexes.

Grocery inflation reached a record high in July, as prices rose 15.4% year-over-year, per Numerator. In particular, the snacks and beverages categories outpaced overall grocery inflation. Both have doubled since the beginning of the year, with snacks prices rising 19% and beverages up 18.1%. Online grocery prices rose +25.7%, said Numerator.

Health and beauty inflation rates doubled in four months. The spike to a year-over-year increase of 18.5% for July in this category had doubled April's 9% increase.

Household products rose 21.6% in July on an annual basis. The biggest increases were noted in household cleaners, and paper and plastic products.

Taken together, the data reported this week indicates that inflation's rise could be starting to ease. But food prices continue to rise rapidly, and that's an important point to underline. Given the importance of the food category to daily lives and its impact across grocery, CPG and restaurants, food could replace fuel as the category to watch.