One of the ongoing puzzles of the US economy in recent decades is why inflation has stayed so low. Even former Fed Chair Janet Yellen has highlighted this puzzle.
The "Amazon effect" may be part of the answer: basically, the Amazon effect is that a higher level of competitive pressure from the rising level of on-line retail sales is holding back price increases that might otherwise have occurred.
Here's a figure illustrating the potential force of the Amazon effect, put together by Kevin L. Kliesen at the St. Louis Fed. As the captions above the blue line show, e-commerce was 2.8% of retail sales, but has now risen to 10.4%.
The blue line itself shows the price level for those items purchased via e-commerce, using 2009 as a base year.
For example, from 2000 to 2009 this price index rose from a little above 90 to 100, implying an inflation rate for these goods of about 1% per year. But since 2009, the price index for goods purchased via e-commerce has actually been declining by about 1% per year.
It's interesting to consider the possibility that the falling prices for e-commerce retail may not be a pure deflation of prices.
It might also reflect cost savings delivered because buying through increasing automated warehouses is becoming more cost-efficient, compared with standard wholesale and retail product chains.
For those who want details on this price index, it's the is the price deflator for “Electronic Shopping/Mail-Order Houses” produced by the US Bureau of Economic Analysis.
It's in Table 7U. Chain-Type Price Indexes for BEA Retail and Food Services Sales.
Of course, a 1% annual price decline on 10% of retail sales cannot, by itself, explain why overall inflation for the entire economy has remained so low.
But if you allow for the possibility that e-commerce prices can also place pressure on bricks-and-mortar retailers to limit their own price increases, the Amazon effect could be a meaningful part of an overall explanation.
Timothy Taylor is an American economist. He is managing editor of the Journal of Economic Perspectives, a quarterly academic journal produced at Macalester College and published by the American Economic Association. Taylor received his Bachelor of Arts degree from Haverford College and a master's degree in economics from Stanford University. At Stanford, he was winner of the award for excellent teaching in a large class (more than 30 students) given by the Associated Students of Stanford University. At Minnesota, he was named a Distinguished Lecturer by the Department of Economics and voted Teacher of the Year by the master's degree students at the Hubert H. Humphrey Institute of Public Affairs. Taylor has been a guest speaker for groups of teachers of high school economics, visiting diplomats from eastern Europe, talk-radio shows, and community groups. From 1989 to 1997, Professor Taylor wrote an economics opinion column for the San Jose Mercury-News. He has published multiple lectures on economics through The Teaching Company. With Rudolph Penner and Isabel Sawhill, he is co-author of Updating America's Social Contract (2000), whose first chapter provided an early radical centrist perspective, "An Agenda for the Radical Middle". Taylor is also the author of The Instant Economist: Everything You Need to Know About How the Economy Works, published by the Penguin Group in 2012. The fourth edition of Taylor's Principles of Economics textbook was published by Textbook Media in 2017.