The cost of broadband Internet access curbs inflationary forces

The one thing that economics professors emphasize when they teach their students about inflation is that while it is a phenomenon that affects goods and services on a large scale, it is important to note that not all goods and services prices increase at the same level.

For example, during the last wave of inflation we saw, the cost of some goods rose sharply. In 2021, the cost of meat, poultry, fish and eggs increased by more than 12 percent, furniture by nearly 14 percent, and the average price of used cars and trucks by 37 percent.

Of course, the geopolitical uncertainty caused by the conflict in Ukraine has pushed oil prices above $100 a barrel, which will undoubtedly contribute to higher inflation estimates in the near future.

However, one of the bright spots in our nascent inflationary times is that Internet access – an increasingly important service in our lives – has not contributed to a return to inflation. In fact, broadband prices have fallen across speeds and technologies over the past five years. The biggest change from the top speed category was seen with the average broadband price at 500+ Mbps dropping by about $60, or 42 percent.

This rarely mentioned phenomenon has been a boon to our economy – especially during the pandemic – and has not only curbed the economic downturn in 2020 but has also contributed to our booming economy in the past 12 months.

Calculating inflation is more complicated than it might seem at first glance. For example, the measurement of the cost of goods is usually (but not always) straightforward: a 10 percent increase in the cost of a land envelope in one year would increase any objective measure of inflation.

However, this is not the case for some goods: for example, cars made in 2022 are more reliable, comfortable and energy-efficient than those made in the 1980s, and the average cost of a new car is three times higher today. As happened 35 years ago, this does not mean that the actual cost of the car has tripled. The Bureau of Labor Statistics is aware of this fact and incorporates the fun improvements into calculus to calculate it.

This phenomenon is also evident in computers and smartphones: every year the latest models have faster chipsets, better cameras and more memory, allowing us to do more than we could before. A phone bought for $600 today is 20 percent better than a $500 phone bought five years ago.

What many people don’t realize is that broadband has also improved dramatically in the past two decades, as internet providers keep finding ways to improve the speed of the internet they offer their customers. Rob Atkinson, president of the Information Technology and Innovation Foundation, notes that broadband speed has increased at an average of 40 percent annually in the United States in the past decade.

In our home, we’ve had to replace our router three times in the past decade due to service upgrades that have allowed us to increase our internet speed.

Cellular networks have seen similar increases in speed: only a decade ago did 4G service begin to become widespread, offering speeds many times faster than 3G. This year, major cellular network providers began offering 5G networks to their customers nationwide, which are several times faster than 4G. In the next few years, our phones will have more features and software to take advantage of the increased speed, allowing us to do more with it.

While the BLS adjusts for the impact of quality changes on Internet access when accounting for inflation, some economists believe it does not do so sufficiently.

Confused by BLS data that showed only modest declines in quality-adjusted prices, Fed economists David Byrne and Carol Corrado put together an alternative price index measure for digital access. Their analysis estimated that the actual cost of digital access, adjusted for connection speeds, fell by a larger amount than what the BLS reported.

For example, from 1998-2007 they found that prices fell by 41.3 percent, while the BLS report indicates a decline of just under three percent. In the ensuing decade, the BLS reported that internet access prices rose 0.3 percent, while Bayern and Corrado estimated average annual quality drop of more than 23 per cent.

These absolute improvements in the price and quality of Internet access are not intuitively obvious, given that most consumers have their Internet with cable TV, which has been rising in cost. And for most of the things families do using the internet — streaming movies, surfing the web, playing games — improvements in internet speed can be difficult to perceive.

But for those whose ability to work at home has been dependent on fast and affordable broadband access, it has been a welcome development and a major reason the economic fluctuations in the past two years have been more modest than most people expected.