The Cost Of Broadband Internet Access Dampens Inflationary Forces

One thing that economics professors stress when they teach their students about inflation is that while it is a phenomenon that broadly affects goods and services, it is important to note that not all goods and services increase in price at the same level.

For instance, during our recent spate of inflation the cost of some goods rose precipitously. In 2021, the cost of meats, poultry, fish, and eggs increased by over 12 percent, furniture by nearly 14 percent, and the average price of used cars and trucks by 37 percent.

And, of course, the geopolitical uncertainty engendered by the conflict in Ukraine has sent the price of oil well over $100 a barrel, which will undoubtedly contribute to higher inflation estimates in the near future.

However, one bright spot in our nascent inflationary times is that internet access—an increasingly important service in our lives—has not contributed to the resurgence in inflation. In fact, broadband prices across speeds and technologies decreased over the past five years. The biggest change is observed from the highest speed category as the average price for broadband at 500+ mbps dropped about $60, or 42 percent.

This infrequently-mentioned phenomenon has been a boon to our economy—especially during the pandemic—and it not only served to dampen the economic decline in 2020 but has also contributed to our booming economy in the last twelve months.

Calculating inflation is more complicated than it may appear at first blush. For instance, measuring the cost of goods is usually (but not always) straightforward: A ten percent increase in the cost of ground chuck in a year would increase any objective measure of inflation.

However, for some goods this isn’t the case: For instance, automobiles made in 2022 are much more reliable, comfortable, and energy efficient than those made in the 1980s, and the fact that an average new car costs three times as much today as it did 35 years ago does not mean that the effective cost of a car has tripled. The Bureau of Labor Statistics recognizes this reality and incorporates hedonic improvements into its calculus to account for it.

This phenomenon is also evident in computers and smartphones: each year the newest models have faster chips, better cameras, and more memory, which allows us to do more than we could before. A phone purchased for $600 today is more than 20 percent better than a $500 phone purchased five years ago.

What many people do not realize is that broadband has also improved dramatically in the last two decades, as internet providers continue to come up with ways to improve the internet speed they provide their customers. Rob Atkinson, President of the Information Technology and Innovation Foundation, notes that broadband speed has increased by an average of 40 percent a year in the United States in the last decade.

In our own household we have had to replace our router three times in the last decade because of service upgrades that allowed us to increase the speed of our internet.

Cellular networks have seen similar increases in speed: It was only a decade ago that 4G service started to become widespread, offering speeds several times faster than 3G. This year the major cellular network providers began offering their customers 5G networks 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 does adjust the impact of quality changes to internet access when calculating inflation, some economists believe it does not do so enough.

Perplexed by BLS data that showed only modest quality-adjusted price decreases, Federal Reserve Bank economists David Byrne and Carol Corrado constructed an alternative price index measure for digital access. Their analysis estimated that the actual cost of digital access, adjusted by connection speeds, fell by an order of magnitude more than what the BLS reported.

For instance, from 1998-2007 they found that prices fell by 41.3 percent, while the BLS reports just under a three percent decline. In the ensuing decade the BLS reports internet access prices went up by .3 percent, while Byrne and Corrado estimate an average quality-adjusted annual decline of over 23 percent.

These absolute improvements in the price and quality of internet access are not intuitively obvious, since most consumers have their internet bundled with cable television, which has been going up in cost. And for most things that households do with their internet—stream movies, browse the web, and play games—improvements in internet speed can be difficult to perceive.

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

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