The ‘Amazon effect’: A trend that affects inflation dynamics

According to Harvard professor Alberto Cavallo, the 'Amazon effect' could explain the low levels of inflation in the United States and South Korea

The 'Amazon effect': A trend that affects inflation dynamics

According to a Financial Times report, online sales of non-food products increased between December 2012 and December 2017, from 11.6% to 24.1% of the entire British market. This figure reflects a trend that is maintained in most of the world, which goes hand in hand with the increasing popularity of web pages dedicated exclusively to retail sales, such as Amazon.

Leer en español: El 'efecto Amazon': Una tendencia que está afectando la inflación

Most recent data published by eMarketer, show that the totality of global transactions in online retail sales during 2017 corresponded to US $ 2.3 trillion. This marked an increase of 24% compared to the sales of 2016 and that corresponds to 10.2% of the total retail sales.

According to the Financial Times, the main reasons for the growth of these web pages are at least two. First of all, for users it is much more convenient to make purchases from the comfort of their homes, because they know that the products they are paying for will arrive in the following days, maybe even the next day of the purchase depending on the services provided by the sales website and the user's location.

Secondly, explains Nick Carroll, senior retail sales analyst at Mintel, many users perceive the prices of pages like Amazon as lower than those of traditional stores, although this is not always the case. The fast growth of Internet retailers has generated what has come to be called the 'Amazon effect'.

According to Alberto Cavallo, an associate professor at the Harvard Business School, who published an article on August 25, published in the Federal Reserve Bank of Kansas City, about the effects of Amazon on the market, "in the past 10 years, competition on the Internet has increased the frequency of price changes and the degree of uniform pricing in all places."

This means that competition between Internet retailers and multi-channel retailers, that is, retailers with both physical and virtual stores, has generated downward pressure on the prices of the products for sale. Cavallo states in his article that "this 'Amazon effect' could help explain the relatively low levels of inflation experienced by the United States in recent years."

You can also read: Uber: Latin America has the highest number of trips

However, this does not only happen in the United States. According to a report by Nomura Holdings Inc., South Korea is the country with the largest disinflationary forces generated by digital technology, because the high speed of the Internet and the great popularity of smartphones has facilitated online purchases, making these a fifth of retail purchases that take place in the country.

The low inflation in the United States has been something that has intrigued the Federal Reserve of the United States (Fed) for years. Forbes reports that the Fed has been studying for some time the possibility that companies like Amazon have contributed to the issue without much success. Even the president of the Fed, Janet Yellen, affirmed in 2017 that low inflation was a mystery to them.

Now, with Cavallo's article, we can know more clearly the contribution of the 'Amazon effect' in controlling inflation worldwide and have better tools to foresee changes in future prices.

In this way, Cavallo concludes his article: "My results suggest that the focus needs to move beyond traditional nominal rigidities: labor costs, limited information, and even 'decision costs' will tend to disappear as more retailers use algorithms to make pricing decisions."

"It will take more work to connect price technologies, web transparency and justice to understand how price behavior and inflation dynamics are likely to evolve in the future," he concludes.

LatinAmerican Post | Juan Diego Bogotá

Translated from "El 'efecto Amazon': Una tendencia que está afectando la inflación"

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