We've talked quite a bit about Amazon (AMZN) and other large retailers in recent months and how they are become so impactful, not only to jobs and the economy, but also to vital economic pulse points: namely inflation. While it may seem strange that these companies can have reverberating impacts on the industry, the truth about it all may actually be stranger.
Recently, economists at Goldman Sachs believe that Amazon might be to blame for the US failing to reach its long-term inflation target. While Amazon is not the cause of this issue, it's definitely a big piece of the problem.
Why would we want inflation to increase? Low inflation isn't necessarily a bad thing, it does put a damper on long-term price stability (i.e. rising steadily as it always has) and achieving full employment. To be clear though, full employment doesn't necessarily mean every single person has a job, rather the unemployment rate is low enough that it doesn't really make a difference to the broader economy because people quit jobs and new jobs to be filled are created all the time. Ultimately, the Federal Reserve won't raise interest rates to something substantial until all other economic pieces align. The near-term inflation target has been 2.0%, and we just aren't getting there.
One of Goldman's economists argued that part of this problem is due to "structural drags in the retail sector." Amazon is to blame here, because average retailers constantly need to cut prices in order to stay afloat in a world where e-commerce giants dominate the market. Not only do these retailers need to cut prices, they also need to offer free shipping and promo-codes/discounts to make sure that customers stay. As a result, prices just aren't rising over time -- in some cases they continue to get lower.
If this scenario pans out, as many expect, this could reduce cored goods inflation by 0.25% and the overall personal consumption inflation by 0.1%. Not the direction to go in for the Fed to reach its target, obviously.
So what else besides Amazon is contributing to the problem? Well costs in health care and education are far outpacing general consumer pricing, which creates a whole mess when it comes to broad price stability. Additionally, Amazon's recent acquisition of Whole Foods means a troubling trend -- this could get worse. Just as Amazon shut down many department stores and their pricing, the same thing could happen to grocers and broad food prices. Shortly after the acquisitions of Whole Foods, Amazon slashed prices as much as 43% in some cases on certain foods and will likely continue to do so.
Where will this take us? We still aren't sure, but low consumer prices are a nice luxury for the time being. The bigger question is when will we ultimately "pay" for this luxury?
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