The Amazon Effect and the Coming Inflation

So far, inflation has eluded us. Was it the Amazon effect? And how will the retail giant fare when inflation finally comes?
KellyFeb 16,2021,16:27

The Amazon effect on inflation has long been discussed. The basic premise is that the e-commerce giant's ability to keep prices low has helped keep the U.S. economy insulated from inflationary pressures. Amazon, which has fundamentally altered the way people shop, has created ripple effects that extend far beyond the decimation of small mom and pop shops that cannot compete with its prices. Amazon's effect on jobs, investment, and inflation continues to be profound.

Amazon's revenue from U.S. consumers' web purchases amounted to 23.1% of U.S. online retail sales in the third quarter of 2020, according to Digital Commerce 360. In the first quarter of last year, Amazon's share of U.S. online retail spiked at 26%. In 2019, Amazon accounted for about 4% of U.S. retail sales. Yes, part of this was due to the pandemic, but the retail behemoth is going to keep growing long-term.

So how does Amazon squash inflation?

Amazon's edge over competitors is obvious. Without storefronts, the electronic giant can slash prices to beat out competitors no matter how much they try to cut prices to stay in the game. An additional benefit of not having physical locations in many states is the ability to pass more savings on to the consumer in the form of no sales tax, a tax that varies state by state. This translates into prices being artificially kept low, something that, while it broadly sounds positive, has some economists worried. To wit, Amazon’s deflationary impact has thrown a wrench into traditional ways of understanding macroeconomic trends. Usually, low unemployment is accompanied by a rise in wages, which is in turn accompanied by a rise in the price of goods, courtesy of companies passing that labor cost on to consumers. It's called Phillip’s curve, the logic of which Amazon has also disrupted.

But isn't inflation a bad thing? Not always. In fact, when the economy is not running at capacity and labor and/or resources are going unused (like in a pandemic, for instance), inflation theoretically helps increase production. More dollars circulating and being spent translates into an increase in aggregate demand. Demand which, in order to be met, theoretically sparks more production.

Still, inflation is coming.

Inflation is coming, experts say hitting 2% in the near to mid-term. Even Amazon cannot stop it. Commodity price inflation in particular is rearing its head. But how will these inflationary forces affect Amazon? Well, if consumers choose Amazon over competitors during non-inflationary times, it only stands to reason they will choose Amazon's lower prices during times when goods and services are set at a premium. While inflation will affect Amazon's prices as well, the giant will still offer prices lower than everyone else.

Amazon, whether it can keep inflation down or not, will no doubt remain the go-to place for better-priced goods.

Topics:amazon, inflation, relfation