How We Calculate It

Complete transparency. All formulas verifiable. All sources cited. Download everything.

Overview

The Deflation Index tracks technological cost reductions across four fundamental sectors: computing, communications, energy, and transportation. Each sector is measured using cost-per-performance metrics that capture the true force of technological progress.

The DI is a weighted geometric mean of these four sector indices, showing how technological deflation compounds over time.

DI = Computing^0.294 × Communications^0.235 × Energy^0.294 × Transport^0.176

Why geometric mean? Technological improvements multiply (compound), they don't add. A geometric mean properly captures this multiplicative relationship.

Where each sector represents fundamental technological progress:

Current Scope (v3.0.3): Four sectors covering approximately 40% of technological impact. Future versions will add healthcare, education, and housing sectors with rebalanced weights. See expansion roadmap →

The Four Sectors

Computing (29.4%)

Metric: $/GFLOPS, $/GB storage, $/GB RAM
Deflation: 99.91% (1990-2024)
Annual Rate: 35-40%
Coverage: 35 years
Sources: AI Impacts, Nordhaus, Backblaze

Communications (23.5%)

Metric: $/GB data, $/minute voice, $/Mbps bandwidth
Deflation: 99.8% (1990-2024)
Annual Rate: 30-35%
Coverage: 35 years
Sources: FCC, BLS, industry reports

Energy (29.4%)

Metric: $/kWh solar LCOE, $/kWh batteries, $/kilolumen LEDs
Deflation: 90% (2010-2024)
Annual Rate: 12% pre-2010, 27% post-2010
Coverage: 35 years
Sources: IRENA, BloombergNEF, DOE

Transportation (17.6%)

Metric: $/kWh EV batteries, autonomous tech costs
Deflation: 88% (2010-2024)
Annual Rate: 18-22%
Coverage: 15 years
Sources: BloombergNEF, DOE, Waymo

Note on Future Expansion: v4.0 will add healthcare, education, and housing sectors. Current v3.0.3 composition uses four sectors with normalized weights totaling 100%.

Calculation Method

The Process

  1. Track cost-per-performance for each component ($/GFLOPS, $/GB, $/kWh)
  2. Index to base year (1990 = 100). As costs fall, the index falls proportionally
  3. Weight components within sectors using geometric means
  4. Combine sectors into DI using the weighted geometric mean formula
DI = Computing^0.294 × Communications^0.235 × Energy^0.294 × Transport^0.176

Why geometric mean? Technological improvements multiply (compound), they don't add. A geometric mean captures this multiplicative relationship.

Why These Weights?

Sector weights (29.4%, 23.5%, 29.4%, 17.6%) reflect three factors:

See detailed BEA analysis and complete methodology on GitHub →

Is This Finding Robust?

To ensure our findings aren't artifacts of weight choices, we tested multiple methodologies:

Methodology Weights (C/Co/E/T) Cumulative Deflation
Multi-Factor (Primary) 29/24/29/18 -96.25%
Equal-Weighted (Baseline) 25/25/25/25 -95.04%

Key Finding: Both methodologies show massive technological deflation (95-96% cumulative). The core finding is robust regardless of weighting choices.

See complete sensitivity analysis on GitHub →

Data Sources

All data comes from authoritative, publicly available sources. Every data point includes source citations in the Excel files.

Source What We Use Reliability
Federal Reserve (FRED) M2 money supply, CPI data 100/100 (A+)
Bureau of Labor Statistics CPI components, historical pricing 100/100 (A+)
IRENA Solar LCOE, renewable energy costs 95/100 (A)
BloombergNEF Battery costs, EV economics 95/100 (A)
AI Impacts Computing power costs (FLOPS) 90/100 (A-)
DOE LED efficiency, transportation data 95/100 (A)
FCC Broadband pricing, network costs 90/100 (A-)
Backblaze Hard drive cost tracking 85/100 (B+)

Average source reliability: 92/100 (A-grade). We prioritize government agencies, international organizations, and industry leaders with transparent methodologies.

Advanced: Sensitivity Analysis

Why provide an alternative? To demonstrate that our core finding holds regardless of weighting assumptions. We provide our Multi-Factor methodology plus an equal-weighted baseline—the simplest possible approach with zero subjective choices.

1. Multi-Factor Weighting Primary

Methodology: Balances three factors: GDP contribution, enabling effect (how much other sectors depend on it), and deflationary force (magnitude of cost reductions).

Weights: Computing 29.4% • Communications 23.5% • Energy 29.4% • Transportation 17.6%

Result: 96.25% cumulative deflation | 2024 DI: 3.74 | Annual avg: -9.21%

Use case: Recommended default. Most comprehensive approach accounting for both direct and indirect economic impact.

Download Primary

2. Equal-Weighted Baseline

Methodology: Simple equal weighting across all sectors. No assumptions about relative importance—pure mathematical baseline with zero subjective choices.

Weights: Computing 25% • Communications 25% • Energy 25% • Transportation 25%

Result: 95.04% cumulative deflation | 2024 DI: 4.96 | Annual avg: -8.45%

Use case: Zero-assumption baseline. If you disagree with our weighting methodology, this shows the finding still holds.

Download Equal-Weighted

Sensitivity Analysis Summary

Methodology 2024 DI Cumulative Annual Avg
Multi-Factor (Primary) 3.74 -96.25% -9.21%
Equal-Weighted (Baseline) 4.96 -95.04% -8.45%

Key Finding: Both methodologies show massive technological deflation (95-96% cumulative). The core finding is robust regardless of weighting choices.

Future Sensitivity Analysis (v4.0+)

When we expand to 7+ sectors (adding healthcare, education, housing), we plan to implement rigorous expenditure-weighted and GDP-weighted methodologies derived directly from BLS Consumer Expenditure Survey and BEA GDP-by-Industry data. We welcome collaboration from economists interested in helping develop this methodology.

Known Limitations & Future Improvements

We're transparent about where the Deflation Index is currently limited. Better to acknowledge constraints openly than to overstate capabilities.

Current Scope Limitations

Sectors Covered (v3.0.3):

Coverage: The current four sectors represent approximately 40% of measurable technological deflation, not 100%. We prioritize defensible measurement over comprehensive coverage—better to measure four sectors perfectly than twenty sectors poorly.

Expansion Timeline: v4.0 (2026-2027) will add healthcare, education, and housing sectors with rebalanced weights across all seven sectors.

Methodological Limitations

Weighting System:

Index Construction:

Conservative Assumptions:

What We Don't Measure

Why These Limitations: We prioritize verifiable, reproducible data over comprehensive coverage. Each limitation represents an opportunity for future improvement and is documented for transparency.

Data Frequency Limitations

Current:

Planned:

Our Commitment to Transparency

These limitations don't invalidate the core finding: massive technological deflation occurred (-96.26% cumulative) while consumer prices rose (+155%). This divergence exists regardless of methodological choices.

What changes with better methodology: The precise magnitude of the gap. Not whether it exists.

We welcome critique: Challenge our assumptions, propose alternatives, suggest improvements. The goal is the best measurement possible, not defending any particular method.