Research Paper Claims US Inflation May Be Impacted By ‘Amazon Effect’

An academic paper presented to some of the world’s top central bankers claimed that inflation may be getting affected by more frequent changes in pricing for goods and a rising tendency of pricing consistency because of the growth of online retailers.

“In the past 10 years online competition has raised both the frequency of price changes and the degree of uniform pricing across locations,” said Alberto Cavallo, an associate professor at Harvard Business School. The study was conducted an analysis of the multi-channel retailers – who have both a brick-and-mortar system of sale and online channels. The companies included the likes of Walmart Inc. The study examined the reaction of such companies to the rise of online retailing companies such as Amazon.com Inc.

The study noted that both types of retailers, there is wide spread use of algorithmic technologies for pricing and there has been a reduction of pricing disparity because of the transparency of the internet. The paper was delivered at the annual conference of central bankers in Jackson Hole, Wyoming.

Among those attending was Federal Reserve Chairman Jerome Powell.

Companies like Amazon are able keep the overall prices steady and therefore this can be one of the reasons of low levels of inflation in the US in recent years despite the economy doing well. Such arguments have in the past been presented by a number of Fed policymakers.

For the first time in six years, the personal consumption expenditures (PCE) price index excluding food and energy components, which is extensively used in by the Fed, touched the Fed’s target of 2 per cent in March this year. However, economists and policy makers have not yet identified any signals that the inflation would rise further which tends to happen when there is low unemployment.

While there is robust growth in eth US economy currently which is the second-longest expansion on record, the unemployment rate is now at 3.9 percent.

This has meant that flexibility is the key for retailers and them becoming more nimble which has resulted in lower margins. As an example, Cavallo pointed out in the study that there were frequent changes in product prices made by Walmart on its website between 2016 and 2018 particularly for those that were easily found on Amazon.

The second quarter sale of Walmart as reported last week exceeded market expectations and was driven by more foot fall at eth stores and more purchase online because of a revamped website. The growth in online sale of Walmart for the quarter was 40 percent compared to a growth of 33 per cent growth in the quarter before. However, the company reported a fall in gross margins for the fifth consecutive quarter.

“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,” Cavallo said.

(Adapted from Reuters.com)

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Categories: Economy & Finance, Strategy, Sustainability, Uncategorized

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