To someone not from an economics background, the idea of ‘chasing inflation’ might seem counter-intuitive. Why pursue inflation―a general increase in the price level of commodities-which wipes off your purchasing power? We, however, are well aware of how increasing inflation (rather bringing back the ‘lost inflation’) which reached near zero levels during the financial crisis, has become an obsession of central banks. Few developed countries will mind additional doses of inflation today. Bank of Japan is still in the trajectory of negative interest rates in the hope of countering the deflation that has plagued the country since the 1990’s. The Fed, at least till last year, was wondering why inflation hadn’t picked up despite the economy nearing full employment. Germany’s inflation rate is not going much beyond the 2% line, which 30 years ago, with the same level of unemployment, would be 5%. This has contributed to Germany’s current account surplus because of increased savings; it is also making it harder for peripheral countries to improve their competitive position vis-à-vis Germany.

This ‘missing inflation’ could mean two things. One, there is a force which is holding inflation back inside many countries. Two, there lies some problem with the way inflation is tracked in these countries. Surprisingly, the answer to both these problems lies in the internet.

If you have not guessed already, the culprit is Amazon. Largely called the ‘Amazon Effect’, retail prices in the USA have been withheld primarily because of the e-commerce giant’s discounting policies. This is not the first time this has happened. Since the 1990’s, Walmart and cheap Chinese imports have held prices back. This pressure seemed to be easing after the financial crisis, until the advent of e-commerce on the big stage. Online sales account for more than 10% of retail sales in the US. From 2000 to 2009, the online price index rose from a little above 90 to 100, implying an inflation rate 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. This implies a deflationary pressure of 10% on all retail sales. If this is not enough, add to it the slashing of prices by brick and mortar competitors to keep Amazon and other e-tailers in check. Goldman Sachs’ chief US economist Jan Hatzius has said that this effect is reducing core goods’ inflation by 0.25% and reducing overall core personal consumption expenditure (PCE) inflation by 0.1%.

The Amazon effect isn’t going to die down soon. Amazon is one of the most valuable companies in the world, and with its billionaire founder, Jeff Bezos, it is looking to expand its horizons. Its acquisition of Whole Foods Market, a supermarket chain, could do to the $800 billion grocery market what it did to the retail market. According to Bloomberg, prices were cut as high as 43% on a range of items at Whole Foods on the first day under Amazon. Food makes up about 14.6% of the consumer price index. Very significant.

Amazon might not stop at the grocery. Amazon Web Services has disrupted the IT industry. Its impact has been called ‘deflationary’ by Citigroup. This triggers a chain reaction of other competitors cutting their prices, and their profits (if not their employees’ wages). As Amazon increases in efficiency, helped by automation, one has to be very optimistic to predict a rise in prices in this war with e-commerce on one side, and all the rest on the other. Nomura had declared ‘Amazonification of Inflation’ one of its 10 grey swans of 2018. As of now, the Amazon effect has had only half the influence of the Walmart effect on inflation. But I would not bet my money against the former outshining the latter very soon. ‘Amazon effect’, in fact, is more of a misnomer. It is not Amazon specific. It is true for all e-tailers in all countries.

With it established how online players can disrupt inflation targeting by central banks, it is imperative that policymakers take into account the effect of online transactions on inflation. The Billion Prices Project (BPP) aims to do just that. BPP gathers data from online retailers in over 70 countries, allowing for real-time inflation updates. It tracks the price level of 5 million goods sold online. Data is published daily, rather than monthly, and with a lag of three days, rather than several weeks. It offers an immediate measure of inflation. A brainchild of 2 MIT economists, BPP also prevents data twisting by governments. It was set up in 2008 in Buenos Aires and it found that the inflation rate in Argentina was three times the official government estimates; 4 years later, The Economist rejected official Argentine numbers. It has more benefits. It costs less and the frequency of measurement is high. It solves many problems of data collection which exist in the status quo. A basket of goods is updated on a real-time basis as new products enter the market and old ones are discontinued. Currently, data gatherers assume people shy away from expensive products. For example, if beef’s price increases, it is assumed people switch to chicken. It ignores how people also consider quality and personal preferences while purchasing. Online purchase data collection solves this as well. It, however, does not give a good enough indication of the price level of services, as they (usually) aren’t sold online.

Central Banks are already adapting to this shift in consumer-producer interaction. Bank of England uses data from Google searches to gauge economic sentiment (searching “estate agent” is a good indicator of housing transactions, for example). Google is itself working on a price index based on online shopping. Asia is already one step ahead of the West. Policymakers throughout all budding Asian economies, from India to South Korea are looking over the internet to gauge inflation. Japan has set up a team to improve its data collection which takes into account online spending. There are strong chances that online purchases will be an important part of Japan’s upcoming Consumption Trend Index, which would measure personal spending. ASEAN members Malaysia, Thailand, Singapore, and the Philippines are not behind as well. “This ‘Amazon effect’ is well documented in the US, but we think they also play a substantial role in keeping inflation low in Thailand as well,” a Bank of Thailand statement adds. China, already a potential leader of the world in the age of big data, is not only monitoring e-commerce activity but also engaging with executives to study the impact in detail. Brace yourselves; leftists predicting the collapse of all social order because of government supervision over our online activity are coming.