The ‘Amazon Effect’ Can Drive Prices Up, Too

The ‘Amazon Effect’ Can Drive Prices Up, Too

In recent years, the so-called “Amazon effect” has been used to explain low inflation in developed economies: Prices are supposedly lower – and more transparent – online, forcing offline retailers to reduce prices. The effect, however, can go both ways – the influence of e-commerce makes prices fluctuate more often, reacting immediately to shocks like energy price and exchange rate jumps.

The “Amazon effect” is such a buzzword that Federal Reserve Chairman Jerome Powell and Bank of Japan governor Haruhiko Kuroda mentioned it earlier this year as one of the reasons for slow price growth. Research conducted in Europe also appears to show that e-commerce growth pushes inflation down.

Evidence presented by Austan Goolsbee of the University of Chicago and Peter Klenow of Stanford University in a 2018 paper shows that inflation is systematically lower online than offline: In 2014 through 2017, the Adobe Digital Price Index (DPI), calculated from millions of online prices, was an average of 3 percentage points lower than the official consumer price index calculated by the U.S. Bureau of Labor Statistics. This doesn’t just confirm the existence of downward price pressure from the internet but implies that once e-commerce is properly integrated into official statistics – something the U.K. Office of National Statistics, for example, announced earlier this year it would do – inflation will likely turn out to be lower than currently reported. See more...

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