The Weight of the World (Wide Web) on Inflation
|Executive Summary
Persistently low inflation over the current expansion has generated a reevaluation of the forces that are driving price changes in the economy. One dynamic that has gained attention is the influence of e-commerce. The wide-scale use of the internet has been pointed to as a disinflationary force since businesses can lower overhead costs and sell directly to consumers. At the same time, the internet generates greater price transparency, leading to increased competition between businesses.
The extent to which e-commerce is holding down overall inflation, however, currently appears small. Online commerce has made the greatest inroads into the retail sector, but goods account for less than one-third of the Consumer Price Index (CPI). Moreover, some of the most heavily weighted categories of goods, such as food, gasoline and autos, still have some of the smallest penetration rates of e-commerce. In the services sector, the biggest disruptions from internet-based platforms are occurring in the travel and public transportation industries, which together account for about 2 percent of the overall CPI.
For e-commerce to bear down further on inflation, online business will need to take a growing share of sales. That is because while the level of prices are on average lower online, research shows that online and “offline” prices tend to change by about the same amount. For many industries, this will not be hard. In retail for example, e-commerce still accounts for only about 10 percent of total sales. However, there may be offsets to the future disinflationary force of e-commerce, including delivery costs, a convenience premium for ordering online and increased industry concentration among U.S. firms more broadly that helps firms’ maintain pricing power.
Under Pressure
E-commerce has erupted since the turn of the century, transforming the way in which consumers shop and businesses deliver their products. In 2000, online orders accounted for less than one percent of retail sales, but that share has grown nearly 10-fold as of last year. The explosive growth of e-commerce has been pointed to as a disinflationary force in the economy since online prices are typically lower. E-commerce lowers prices through two main channels. First is the direct effect on prices. Companies selling online face lower overhead costs than their traditional peers. Without rent to pay for a storefront or office space, businesses can pass on those cost savings to their customers. The cost of changing prices is also minimal compared to physical outlets, which need to update displayed prices. Shipping costs still need to be accounted for, but using products on Amazon as a proxy for online prices, recent research has shown that online prices are 6 percent lower than “offline” prices on average.
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