The Strategist

"Amazon effect" prevents the US Federal Reserve from pursuing monetary policy

12/13/2017 - 14:13

The ability to compare prices on the Internet hinders the acceleration of inflation.

Mike Seyfang via flickr
Mike Seyfang via flickr
Thanks to smartphones, consumers can now easily compare prices on the Internet. But this prevents prices from rising and inflation – from accelerating to a target of about 2% in the US and other developed countries. Therefore, their central banks, in particular the US Federal Reserve System (FRS), find it increasingly difficult to make decisions on raising interest rates.
It is expected that the Fed on Wednesday will raise interest rates by 0.25 percentage points to 1.25-1.5% and will give a forecast on their further actions. Given the growth in GDP and low unemployment, many Fed governors note the need to gradually raise interest rates to reduce the risk of overheating of the economy and the emergence of bubbles in financial markets. But some managers hesitate, as inflation remains below 2% for most of the year.

Some economists attribute low inflation to factors such as population aging, slower productivity growth and globalization, which hinder price and wage growth. Consumer spending now exceeds two-thirds of US GDP, so this list also included the development of online trading. In autumn, Fed Chairman Janet Yellen noted that online trading has led to an increase in competition that prevents companies from raising prices, and this "can contribute to a sustained slowdown in inflation in many countries."

Influence of online trading on inflation was called "Amazon effect", and economists has already begun to study it. As the Goldman Sachs study showed, competition between online stores can reduce the price index for personal consumer spending - the Fed's preferred inflation rate is 0.25 pp. This is not too little, given that the consumer price index for October was 1.4% in annual terms.
The Fed also needs to take into account that the share of online commerce is growing. It was 3.6% of retail sales in the US in the III quarter of 2008, then in the third quarter of 2017 it already jumped to 9.1%, according to the US Census Bureau. Boomerang Commerce reports that more than half of sales of books, music and videos are now carried out online.

Prices for many consumer goods in October decreased compared to a year earlier. According to the Ministry of Labor, toys became cheaper by 8%, books - by 3%, and sports goods - by 1.9%. In the services sector, on the contrary, the annual rate of inflation has not been fall below 2% for six years already. In many respects, this is connected with the growth of the cost of rent, health care and education.

Some economists believe that competition among online retailers will increasingly influence the policy of central banks. The chief economist of the Bank for International Settlements (BIS), Claudio Borio, calls on central banks to revise the target inflation values, given the downward pressure on it and technological progress. 

However, other economists are skeptical about the Amazon effect. The president of the European Central Bank (ECB), Mario Draghi, does not see enough evidence that e-commerce is slowing inflation in the euro area, "at least on a scale that can be measured."

Evaluating the effect of Amazon really represents a problem. Few statistical agencies collect data on online prices. In addition, economists may underestimate this effect due to the fact that online retailers are poorly represented in the consumer price index.

Previously, the effect of Walmart was also observed. As a study by the Bureau of Labor Statistics (BLS) in 2005 revealed, Walmart's appearance in new markets forced competitors to cut prices. According to BLS estimates, because of the growing popularity of large supermarkets, prices for most foodstuffs decreased by about 1.5% from 2002 to 2007. But in the case of the Walmart effect, there was only one dominant retailer, which contributed to lower prices. Now, thanks to the ability to compare prices on the Internet with smartphones, "consumers already have extraordinary buying power," notes Rick Rieder of BlackRock.