When Federal Reserve Chairman Janet Yellen and her colleagues at the Fed meet to discuss inflation, one word that may have been adding to the discussion alongside oil, health and housing is Amazon. With Amazon’s ability to cut prices and pummel its rivals into submission there is now a growing feeling that, as Ed Yardeni, economist and president of Yardeni Research puts it, ‘Amazon is killing lots of businesses. In the process, it may also be killing inflation’. He went on to say, ‘Amazon arguably has done as much as the Chinese to kill jobs and keep a lid on inflation by enabling fast and easy price discovery for anyone with a cellphone’. And now with Amazon’s purchase of Whole Foods, Jeff Bezos, Amazon’s CEO, may be about to extend his reach. As it stands at the moment, food makes up nearly 15% of the US CPI (consumer price index), a little less than transportation.
‘Now Amazon is going to reshape the entire food retailing industry and it is highly deflationary — and this is an $800 billion grocery market we're talking about’ is how David Rosenberg, senior economist and strategist at Gluskin Sheff sees it. Sheff believes we are going to see ‘a supermarket war of historic proportions’. Amazon’s vast use of automation and its unparalleled scale means that price pressure will be intense in the coming years. This is not to say that the likes of Walmart are letting Amazon have it all its own way. Earlier this year Walmart began discounting thousands of items that consumers could purchase online and pick-up instore. This is being expanded to 1m items. Walmart also offered free delivery on orders over $35, Amazon promptly cut the minimum to $25. In a recent report Morgan Stanley recognised the difficulty that old-style retailers are going to have stating: ‘Traditional retailers will struggle to compete with a business that generated an estimated $225 billion in global gross merchandise value in 2016, growing 29% year-over-year and has the discipline to operate at a 1% margin’.
Not all agree with this assessment though. Mark Zandi, chief economist at Moody's Analytics believes the overall impact on inflation will be small. Zandi believes that ‘if Amazon is responsible for reducing retail goods inflation by 1 percentage point per annum — an aggressive assumption — then this will reduce overall inflation by 0.15%. Not inconsequential, but not a game changer’. But in doing the maths, 1% per annum equates to 10% reduction in retail goods over a decade, reducing inflation by 1.5% over the same period. It may be an aggressive assumption, but even if it’s 50% right, that’s still a massive effect.
Nonetheless, for many CEOs across a wide range of industries, Amazon remains a ‘ridiculously scary’ rival as Greg Maffei, head of Liberty Media put it. Adding Amazon ‘has an ability, because of its scale, to invest at incredibly low or negative rates of return — because they can cross-subsidize, and the market is willing to suspend disbelief in future profitability’.