Last weekend, in Jackson Hole, Wyo., as they do every year, many of the world’s central bankers gathered to discuss vital economic matters that seize the attention of global markets. Amid the big topics of discussion at the annual shindig convened by the Federal Reserve Bank of Kansas City was inflation, or the lack thereof. Many economists remain puzzled that, after nearly a decade of remarkably stimulative policy from the world’s central banks, the overall price level isn’t budging much. In the U.S., inflation has failed to reach the Federal Reserve’s 2 percent target for several years, and in the past 12 months, the Consumer Price Index rose just 1.7 percent.
On Monday, Amazon, having formally taken control of the upscale grocery chain Whole Foods, set about aggressively slashing prices on a host of products, including ground beef, milk, and avocadoes.
None of the high-minded academic sessions on the Jackson Hole agenda dealt with the Amazon–Whole Foods merger. But perhaps they should have. For even as we puzzle over the ways in which the actions of central banks matter when it comes to influencing the path of inflation, it is becoming clear that the actions of businesses can have as much impact — if not more.
“Inflation is everywhere and always a monetary phenomenon,” as the influential economist Milton Friedman famously said. Put another way, generations of economists and central bankers have been raised to believe that the interest rates, money supply, and balance sheets controlled by the world’s central banks determine the rate of inflation.
But we’re learning in this decade that there are vast deflationary forces afoot in the world that can counteract the efforts of central banks to spur inflation. These include, but are not limited to, international trade, the weakness of labor unions, shell-shocked and insecure workers being afraid to ask for raises, corporations relentlessly managing costs, greater transparency in pricing, gains in technology and productivity, and…the immensely powerful surge of e-commerce and supply chain optimization.
We’re learning that vast deflationary forces can counteract the efforts of central banks to spur inflation.
Amazon, as a company and as a representative of the broader e-commerce, logistics, and optimization industry, serves as both a metaphor and actual proof of how this works in the economy. Since its founding more than 20 years ago, Amazon has been a deflationary force. The Everything Store, as the author Brad Stone calls it, avoided many of the costs that have burdened brick-and-mortar companies and competed on the basis of offering lower prices. As it gained scale and expanded the range of its offerings — from books to apparel, cosmetics, and foods — Amazon has been able to drive better bargains for the goods it sells, and, importantly, to reduce costs in its supply chain. The more fulfillment and distribution centers you operate and the more you automate them, the more planes and trucks you lease, the less it costs you to deliver goods. Amazon has deployed robots, algorithms, software, and hundreds of engineers to take minutes and seconds out of every process it runs.
Amazon’s global annual sales in 2016 were about $136 billion, a small fraction of total retail sales. But, just as Walmart’s relentless cost control in the 1990s forced the rest of America’s retailing complex to reduce its costs (thus helping to tamp down inflation), Amazon’s impact ripples far beyond its own operations. Established companies and upstarts alike know that if they are to compete with Amazon, they must relentlessly rationalize their own operations. To a degree, Amazon is like a powerful cyclist at the head of the peloton at the Tour de France — spurring the teams behind him to increase their velocity or be left behind.
The process has been brutal for the margins and for the business models of many businesses, and has caused economic damage to established retailers, and to their landlords and employees. Just as in bike races, not everybody can keep up. The inability of many established retailers to cut costs or reengineer their businesses so that they can keep pace with Amazon and all the other e-commerce companies has been a key driver of the so-called retail apocalypse.
But it has been an unalloyed good for consumers, who generally reap the economic benefits of lower prices, greater selection, and time saved. Amazon’s foray into grocery stores provides a highly visible and impactful example of the way this works. Bloomberg on Monday provided a handy chart showing some of the big price reductions Amazon implemented at Whole Foods: organic baby kale, off 13 percent; organic bananas, off 30 percent; organic rotisserie chicken, off 29 percent.
These may be showy efforts intended to increase traffic. But it’s hard to deny the deflationary impact of such efforts. And, again, the impact isn’t just at Amazon’s stores. Investors on Monday drove the stocks of several grocery store chains down. Why? They’re presuming that other grocery chains will have to match Amazon’s efforts to reduce prices at Whole Foods. And while that will be great news for the millions of consumers who don’t currently shop at Whole Foods, it may be quite bad news for the margins of established grocers.
Put another way, Amazon’s highly public price-shopping isn’t just deflating prices immediately at the stores it controls. It’s deflating future expectations about the pricing power of all grocers. The economists who are planning next year’s Jackson Hole conference may want to consider having a panel on how the deflation inherent in the ever-expanding realm of e-commerce should influence central bankers’ inflation expectations.