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Does online mean deflation down the line?

| Posted by: Paul Donovan | Tags: Paul Donovan Weekly

  • Internet retailer Amazon's purchase of food retailer Whole Foods has driven a discussion of deflation. The simplistic argument is that online competition will drive down food prices. The reality is likely to be different.
  • After inventing the internet, the British rushed to shop online. Between 15% and 19% of UK retail sales (excluding auto fuel) are online. Between 5% and 5.5% of UK food sales are online. 
  • UK food prices did not fall as online food shopping rose (there is no correlation). Deflation in UK clothes prices came to an end just as online shopping for clothes exploded. 
  • Online food shopping may even increase inflation. Consumers are very unlikely to compare prices on different websites before buying milk from one, bread from another, and frozen food from another. Such a strategy would entail significant delivery costs – the cash cost and the inconvenience of staying at home to wait for each delivery. Consumers are likely to stick with a single supplier for high frequency purchases, and that inertia gives the supplier pricing power. 
  • From 1990 to 1995, UK book price inflation averaged 4.8%. Over the past five years, book price inflation averaged 5.2%. US food shoppers may like to take note.