Amazon is so good at keeping prices low, it’s changed how economists think about inflation

I was immediately skeptical of the conclusion implied by this headline.  Yes, Amazon is pervasive in everyone’s lives at this point, but could one company permanently shift inflation? I asked my resident economist if this was really a thing. The answer? YES.  This IS a conversation economists are having.  The Quartz article cites Kevin Kliesen, an economist at the St. Louis Fed.  Not only has Amazon been disruptive to ALL retail,  (more on that below), but it may be having a measurable impact on inflation.   

Mark Whitehouse explained the “Amazon Effect” in a Bloomberg article in October:

‘The idea is that as online retailers gain market share, they're putting pressure on brick-and-mortar shops to keep prices down. This, in turn, might be preventing inflation from getting back up to normal.’

Through September of this year, the price level for commodities excluding food and fuel had dropped a full percentage point from a year earlier! This is not the first time we have seen this sort of phenomenon before: in the 1990’s it was called the “Walmart Effect.”  Kliesen points out that the growing share of e-commerce coupled with the decreasing prices of e-commerce goods are highly correlated with the low inflation we are experiencing.  Driving home the point: a New York Times article explains how Amazon enabled the $20 WyseCam to come to market, a perfect substitute for home internet cameras from Nest or NetGear that sell for ten times as much.

Not all economists agree on this.  

A recent Business Insider article claims the “Amazon Effect” can’t explain low inflation.  It cites skepticism in a speech by Janet Yellen.  Jim Bullard, President of the St. Louis Fed, has commented that technology, which gets cheaper over time, may be keeping the price level down.  And Jonathan Fortun, a senior research analyst at the International Institute of Finance, does not believe the “Amazon Effect” could be big enough to account for the current flat price level, and fully expects inflation to return to levels the Fed projects.

The bottom line? The tricky part in proving anything beyond the correlation that Kliesen shows would be in uncovering the data to do so.   If the “Amazon Effect” turns out to be real and sustained, how will lower inflation impact our spending and investment behavior going forward?

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The topic of inflation is covered in depth in NGPF Activity ANALYZE: Understanding Inflation if you want to have your students “dig deeper” on the topic.

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Below the line: Is retail dying off?  

Money magazine’s Meet the New Faces of Retail explains how these retailers are adapting to the new world.

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