How The Amazon Effect Affects Inflation, eCommerce

When thinking about the “Amazon Effect,” one may think invariably about retail, and the impact the eCommerce giant has on the sector — changing the very nature of how everything from books to clothes are bought and brought to end customers.

Might there be another “Amazon Effect” worthy of illumination?

Bloomberg reports that Amazon might be helping keep inflation lower than some economic models might have guessed — an impact that has been fairly long lived, and has lasted through the economic expansion that has marked the past decade.

Yes, Amazon has been able to keep prices low, but there is another impact that is getting consideration, tied to a paper that was presented in a paper at a Federal Reserve symposium in Jackson Hole, Wyoming.

The paper was presented by Harvard Business School economist Alberto Cavallo. In that paper, the economist stated that the other effect has been one where Amazon has induced price changes at other retailers, including large ones such as Walmart, and helped lead to more uniform pricing of the same item across locations.

Thus, according to Cavallo, as online purchases account for even more of retail sales, from the period 2008 to 2017, the “duration” of prices for items at Walmart and other retailers fell to 3.7 months from 6.5 months.

The ripple effect has been one where that shift has meant greater impact from U.S. dollar exchange rates and gas prices on those more uniform prices.

“For monetary policy and those interested in inflation dynamics, the implication is that retail prices are becoming less ‘insulated’ from these common nationwide shocks,” Cavallo wrote in the paper. “Fuel prices, exchange-rate fluctuations, or any other force affecting costs that may enter the pricing algorithms used by these firms are more likely to have a faster and larger impact on retail prices than in the past.”

The aforementioned impact of shorter-duration pricing at retailers has implications for monetary policies, according to Bloomberg, as automatic adjustments to what are known as external shocks means that interest rate adjustments by the central bank may lose potency.

“For monetary models and empirical work, my results suggest that the focus needs to move beyond traditional nominal rigidities,” Cavallo wrote. “Labor costs, limited information, and even ’decision costs’ (related to inattention and the limited capacity to process data) will tend to disappear as more retailers use algorithms to make pricing decisions.”

As a result, the traditional models of monetary policy may find a bit of a challenge — one leg of policy has focused on inflation. As Bloomberg noted, the Fed has had to “navigate the signals” from unemployment as inflation, as another paper that focused on central bank policy — this time from the Fed’s Board of Governors in Washington — said that policymakers should avoid focusing too much on inflation, and perhaps are not focusing enough on unemployment. The relationship between unemployment and inflation is weaker than it has been in the past.