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Is Amazon Holding Back Inflation?

This article is more than 5 years old.

In a recent speech, Fed Chairman Jay Powell argued that Amazon may be one factor holding back inflation. As CNBC reports, he replied to a question about why inflation has been so low with a list of possible causes:

"It's a global phenomenon. We don't perfectly understand it. Since the [financial] crisis, a big factor that has been weighing down inflation is just the weakness in the economy. You had a lot of slack and the economy has not been tight," Powell said Thursday during his testimony to Senate Banking Committee.... There are other stories. There's the Amazon effect story. There's global slack. The idea that slack around the word is affecting the tightness of the U.S. labor market. [It's] really hard to tie those down from an empirical standpoint, but they may be having some sort of an effect on inflation," he said.

He's right that from an empirical standpoint this is hard to tie down, but it's important to understand that because of how the CPI is measured, the scope for Amazon to lower inflation is limited.

The big picture problem with Powell's claim is this: when consumers switch from high priced outlets to low priced outlets, this doesn't affect inflation. The BLS measures inflation by tracking the average changes in prices for items within specific stores, it doesn't compare the level of prices between different stores at all. When the BLS replaces one store in it's sample with another, it uses a linking procedure that ignores differences in the level of prices between these stores. So when consumers save money by buying TVs at Amazon instead of Best Buy, this gradual change in prices paid doesn't show up in the CPI.  This is a well-known effect in the economics literature known as "outlet bias".

This doesn't mean Amazon is having zero effect on inflation. Amazon can still hold back inflation by forcing retailers to drop their prices, and by increasing prices the prices of goods for sale on Amazon.com more slowly.

So  the main effect of Amazon, which is offering lower prices and taking market share, may be significantly reducing actual experienced inflation by consumers but not measured inflation. And to the extent it is reducing measured inflation, it's limited to basically forcing retailers to compete more by lowering their own prices.

It's important to understand that however important both the inflation bias and the measured deflation pressures are, it's not a new story, just a new focus. In 2003, for example, Jerry Hausman had this to say about the effects of Walmart on inflation, arguing that...."it ignores shifts in shopping patterns to lower-priced stores, like the shift to stores such as Wal-Mart, which is both the largest retailer for consumer products as well as the largest supermarket chain in the United States, a shift that creates the problem of outlet bias."

Are existing retailers under pressure from disruptive competitors that are biasing inflation measures downward and also potentially holding back measured inflation by putting pressures on price changes? Yes, as they have been for the past 30 years.