Low inflation caused by e-commerce?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
User avatar
Raybo
Posts: 1669
Joined: Tue Feb 20, 2007 11:02 am
Location: San Francisco
Contact:

Low inflation caused by e-commerce?

Post by Raybo » Tue Jun 12, 2018 7:15 pm

This article at the NY Times posits that the reason for persistent low inflation is e-commerce. While it is easy to think "it is different this time," the internet and e-commerce might be a one-time event that has changed the impact of inflation going forward.

The article points out that much of what is in the CPI is not bought on-line (health care, housing, gasoline). It also suggests that the ease with which people can compare prices keeps them lower.

Since inflation is one of the "unknowns" of retirement planning, the idea that going forward inflation might be lower than in the past is an intriguing possibility!
No matter how long the hill, if you keep pedaling you'll eventually get up to the top.

snarlyjack
Posts: 780
Joined: Fri Aug 28, 2015 12:44 pm
Location: Montana

Re: Low inflation caused by e-commerce?

Post by snarlyjack » Tue Jun 12, 2018 9:29 pm

Raybo,

I have a friend that lives in Malaysia that I have been
e-mailing for years.

According to him the wages in Malaysia & Asia are terrible.
He is a computer system analyst. Highly educated, he
makes very little money.

He say's you can live like a king on $500. a month.

Valuethinker
Posts: 36038
Joined: Fri May 11, 2007 11:07 am

Re: Low inflation caused by e-commerce?

Post by Valuethinker » Wed Jun 13, 2018 3:35 am

Raybo wrote:
Tue Jun 12, 2018 7:15 pm
This article at the NY Times posits that the reason for persistent low inflation is e-commerce. While it is easy to think "it is different this time," the internet and e-commerce might be a one-time event that has changed the impact of inflation going forward.

The article points out that much of what is in the CPI is not bought on-line (health care, housing, gasoline). It also suggests that the ease with which people can compare prices keeps them lower.

Since inflation is one of the "unknowns" of retirement planning, the idea that going forward inflation might be lower than in the past is an intriguing possibility!
Inflation, real gdp growth and productivity are interrelated. I am not sure I have a clear story about inflation in my mind, so please excuse the stream-of-consciousness below.

The long run determinant of living standards is productivity growth.

In the late 1990s it looked like new technology was finally having a significant impact on productivity growth. Analysis by McKinsey suggested that it was in 3 main areas:

- electronics manufacture (think Dell) adopting the techniques of Toyota (lean manufacturing etc.)
- logistics (think WalMart, which drove 40% of all productivity improvements in the 1990s at least on one analysis I saw)
- securities (think Charles Schwab and stockbroking online)

Since then productivity growth has been much more sluggish, across the developed world. In a number of countries, like the USA, there was explosive growth in personal debt. Post Crash, the US consumer has rebuilt her balance sheet, but other countries (Australia, Canada) have kept right on borrowing and spending. There was a lot of growth in financial services, but not much corresponding growth in the overall economy or productivity. The 2008-9 Crash unwound some of that, but FS is still bigger relative to the economy as a whole than it was in say 2000, I believe (let alone 1990).

None of this is bullish for real GDP growth. Add in the demographic situation (both less immigration and fewer children per woman) and we are likely in for a couple of decades of slow growth. That probably means that inflation is constrained. In addition, the success of fracking suggests that energy price growth will be constrained -- and that has a knock on effect on a lot of what the consumer consumes.

The internet helps keep a cap on product prices and Amazon is certainly a productivity driver, but the big drivers of inflation and economic activity are services like healthcare which seem stubbornly resistant to greater productivity.

User avatar
JoMoney
Posts: 5900
Joined: Tue Jul 23, 2013 5:31 am

Re: Low inflation caused by e-commerce?

Post by JoMoney » Wed Jun 13, 2018 4:01 am

e-commerce created competition local businesses didn't have before
In the past, if a local businesses rent went up, if local wages went up, they would raise their prices and the customers would have to consider how far away they'd be willing to travel to find a better price.
It also created a glut of products, not just is supply seemingly abundant, the choices of substitution products is abundant. There's been deflation in the value of "stuff" relative to the time one has to spend performing some service to exchange for it.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

User avatar
Top99%
Posts: 332
Joined: Sat Apr 22, 2017 9:30 am
Location: Austin, TX

Re: Low inflation caused by e-commerce?

Post by Top99% » Wed Jun 13, 2018 7:54 am

After reading "The New Wealth of Nations" by Surjit Bhalla I think globalization is actually much more of a factor than e-commerce. This book talks about globalization driving down wage growth (one of the biggest drivers of inflation) first in manufacturing (starting around 1980) and then starting around 2000 in industries requiring a college degree but not local workers. This certainly mirrors my experience as an engineer at Megacorp with offices all over the world along with many of my friends who compete globally. Basically globalization is providing an essentially unlimited supply of skilled labor. I guess one could take the view that e-commerce supports globalization my providing easy access to the global skilled labor pool and its fruits. I also believe fracking + dropping costs for renewable energy is another big factor holding down inflation since energy costs are another big contributor to inflation. Short summary is I don't see a repeat of US 1970s level inflation. But, there certainly could be some sort of black swan that makes me wrong.
Adapt or perish

Valuethinker
Posts: 36038
Joined: Fri May 11, 2007 11:07 am

Re: Low inflation caused by e-commerce?

Post by Valuethinker » Wed Jun 13, 2018 9:28 am

Top99% wrote:
Wed Jun 13, 2018 7:54 am
After reading "The New Wealth of Nations" by Surjit Bhalla I think globalization is actually much more of a factor than e-commerce. This book talks about globalization driving down wage growth (one of the biggest drivers of inflation) first in manufacturing (starting around 1980) and then starting around 2000 in industries requiring a college degree but not local workers. This certainly mirrors my experience as an engineer at Megacorp with offices all over the world along with many of my friends who compete globally. Basically globalization is providing an essentially unlimited supply of skilled labor.
The essential precondition for globalization in manufacturing (globalization itself is nothing new, and was arguably as great in 1900, when the British Empire spanned c. 40% of the land surface of the planet, than as now) was containerization. See Marc Levinson "The Box" for a history-- it was the Vietnam War which made it happen, by posing the US logistics command with perhaps the worst logistics problem in history*, which they tackled by committing to containerization, thus financing the origin of the industry (McLean at Sea Containers).

I would argue unskilled rather than skilled labour. Skilled labour is anything but in infinite supply. What became possible was a car assembled in Mexico of Chinese parts, or the mass migration of consumer goods production to China, which had a virtually infinite supply of biddable labour.

Skilled labour? 1 million Indian call centre workers, and say 300k IT outsourcers, yes (I'd have to check the numbers, those are wild-assed guesses), yes. But infinite? No.
I guess one could take the view that e-commerce supports globalization my providing easy access to the global skilled labor pool and its fruits. I also believe fracking + dropping costs for renewable energy is another big factor holding down inflation since energy costs are another big contributor to inflation. Short summary is I don't see a repeat of US 1970s level inflation. But, there certainly could be some sort of black swan that makes me wrong.
Energy costs are, from memory, about 5% of US GDP. The share of energy costs in GDP in all the developed world has fallen since the 1970s-- we've gotten more efficient in our use of energy. Things like virtually abandoning the use of petroleum for electric power generation. Airplanes and cars are much more fuel efficient, etc.

There's good evidence for this. In 2008 oil prices spiked back to their winter of 1979 highs (in real terms) c. $150/ bl. There was no commensurate surge in inflation.

Similarly 2010 & post they went back over $100 for 4-5 years. In the 1970s, that surge would have been big enough to kick off a wage-price schedule. Instead, not much happened to inflation.

I doubt renewables have yet had much impact. Renewables compete in electricity generation primarily with coal and gas. And they are not (yet) big enough to have much impact except in a very few countries (and Germany they have probably pushed power prices up not down). What has happened is fracking - cheap natural gas has changed power station economics. And tight oil has meant that oil supply is significantly more price elastic than it once was. When any producer considers reducing production, they have to consider the possibility that US frackers will just eat up the shortfall.

* There are many (good) reasons to critique MACV commander General WIlliam C Westmoreland. His strategic vision was completely inappropriate to a jungle war against an elusive opponent. But he was a talented logistician. The US military, with an unprecedented requirement for supplies-- more machines, higher ammo expenditure, etc. than in previous wars, had to put 550k men into what was essentially an undeveloped country. They did things like build what became one of the largest ports in the world (Cam Ranh Bay).

If you see Westmoreland's actions through the lens of logistics, his strategy becomes more understandable. It still misunderstood the enemy he was fighting. And it's also clear he was aiming for a 750k+ man intervention force, without understanding the political limits on US commitment that the politicians in Washington faced.

(I just read a historic of the later parts of the Pacific War, 1944-45, and again the problem of constraints surfaces. FDR & General Marshall faced a public and military rank and file which were tired of war, and very sensitive to casualties. There was a risk that the invasion of Japan (Operation Downfall: composed of Operation Olympic (Kyushu) and Operation Coronet (Tokyo Bay)) would just be too bloody for the Americans to actually complete. Policies towards encouraging Soviet intervention and the use of the atomic bomb thus become more comprehensible).
Last edited by Valuethinker on Thu Jun 14, 2018 3:30 am, edited 1 time in total.

Dead Man Walking
Posts: 698
Joined: Wed Nov 07, 2007 6:51 pm

Re: Low inflation caused by e-commerce?

Post by Dead Man Walking » Thu Jun 14, 2018 12:31 am

My purchase of a John Deere lawn tractor in April, 2004, and in again in July, 2017, is an example of a consumer purchase that reflects low inflation. In April, 2004, I purchased a John Deere L110 lawn tractor at a local John Deere dealership for $1,799. In July, 2017, I purchased a John Deere D130 lawn tractor for $1,899 at a local John Deere dealership. The D130 has a larger engine, larger rear wheels and tires, a better seat, and a front bumper that were not included with the L110. The newer tractor also has a few engineering improvements. The chassis, deck, and body are essentially the same. John Deere may have improved productivity in the 13 years between those models. Low inflation had to be a factor. Competition may be a factor. Since both were made in the USA, globalization probably had little influence. Ecommerce certainly wasn't a factor since both were purchased at a local brick and mortar dealership.

DMW

Valuethinker
Posts: 36038
Joined: Fri May 11, 2007 11:07 am

Re: Low inflation caused by e-commerce?

Post by Valuethinker » Thu Jun 14, 2018 3:19 am

Dead Man Walking wrote:
Thu Jun 14, 2018 12:31 am
My purchase of a John Deere lawn tractor in April, 2004, and in again in July, 2017, is an example of a consumer purchase that reflects low inflation. In April, 2004, I purchased a John Deere L110 lawn tractor at a local John Deere dealership for $1,799. In July, 2017, I purchased a John Deere D130 lawn tractor for $1,899 at a local John Deere dealership. The D130 has a larger engine, larger rear wheels and tires, a better seat, and a front bumper that were not included with the L110. The newer tractor also has a few engineering improvements. The chassis, deck, and body are essentially the same. John Deere may have improved productivity in the 13 years between those models. Low inflation had to be a factor. Competition may be a factor. Since both were made in the USA, globalization probably had little influence. Ecommerce certainly wasn't a factor since both were purchased at a local brick and mortar dealership.

DMW
These days, where something is "made" is pretty obscure. Thus, your Deere tractor might have components made in China or Mexico, and subassemblies done in Canada or Mexico. I think they tracked a car part that crossed the Canadian and Mexican borders 48 times on the way to becoming a car. The steel could be from anywhere-- American, or Canadian (the next largest supplier to the US market), etc.

And of course Deere will be feeling the heat from cheaper, Chinese made, production. Thus that helps to keep the price down.

What *is* probably American is the brand and the intellectual property of design, etc. underlying.

I agree with you that manufacturing output keeps chugging ahead. I can't remember the time period, but US industrial output basically doubled, and employment did not rise at all (I think this is from the early 1980s, not sure).

But no one is entirely free from globalization. US healthcare feels it only marginally -- grey market imports of drugs, medical tourism. That's probably as close to minimal pressures from globalization as it gets.

thx1138
Posts: 779
Joined: Fri Jul 12, 2013 2:14 pm

Re: Low inflation caused by e-commerce?

Post by thx1138 » Thu Jun 14, 2018 4:55 am

Dead Man Walking wrote:
Thu Jun 14, 2018 12:31 am
Ecommerce certainly wasn't a factor since both were purchased at a local brick and mortar dealership.
Just to nitpick if I bought a book in a brick and mortar store in 2008 and then again bought a book in 2018 at a brick and mortar store it would be silly to say e-commerce had not impacted the experience or price :wink: But I get what you were really trying to say - lawnmower purchases are still not particularly affected by online sales. It is a good example. A similar one in a much larger market are vehicle sales. Something like a Honda Civic is at the same real price as twenty years ago with just a phenomenal amount of additional features and performance. Meanwhile new models like the Fit were created that still have way more features and performance than the Civic of two decades ago and sell at a substantially discounted real price.

User avatar
Top99%
Posts: 332
Joined: Sat Apr 22, 2017 9:30 am
Location: Austin, TX

Re: Low inflation caused by e-commerce?

Post by Top99% » Thu Jun 14, 2018 7:55 am

Valuethinker wrote:
Wed Jun 13, 2018 9:28 am

I would argue unskilled rather than skilled labour. Skilled labour is anything but in infinite supply. What became possible was a car assembled in Mexico of Chinese parts, or the mass migration of consumer goods production to China, which had a virtually infinite supply of biddable labour.

Skilled labour? 1 million Indian call centre workers, and say 300k IT outsourcers, yes (I'd have to check the numbers, those are wild-assed guesses), yes. But infinite? No.
A main point in the book I referenced is the *global* supply of college educated workers is growing extremely rapidly with no end to the growth in sight. Many of us in the US are already feeling the impact of this with wage growth lower than inflation since 2000 or so. I have access to the pay scale range data at my MegaCorp and with the exception of Silicon Valley the US ranges have moved up less than the inflation rate for quite a while now in spite of a tight labor market. And since MegaCorps benchmark against each other I think it is safe to assume this is fairly widespread, at least in technology.
It also mirrors the stats on the slowdown in the wage growth of college educated workers described in the book.
The number of skilled jobs that require US based skilled resources (IE can't be off-shored) is pretty small overall and will decline further as technology enables things like remotely controlled surgery. The rest can tap the (rapidly growing) global pool of college educated workers. So, given automation + a growing skilled global work force it is just hard for me to see wages putting much pressure on inflation. Overall I think this situation is situation is good because more people joining the middle class on a global basis will increase demand for goods and services without a commensurate rise in inflation.
Adapt or perish

Easy Rhino
Posts: 3267
Joined: Sun Aug 05, 2007 11:13 am
Location: San Diego

Re: Low inflation caused by e-commerce?

Post by Easy Rhino » Thu Jun 14, 2018 12:39 pm

Here's a link to the NBER working paper, which costs $5 but lots of people can get it free:

http://www.nber.org/papers/w24649.pdf

Anyway, I only buy this theory if the CPI measurements don't take into account online merchants at all, compared with B&M merchants.

Because retail spending on "stuff" is still a smallish part of the CPI relative to food, energy, housing, healthcare, and services. And online purchases are only a percentage of stuff purchases.

User avatar
alpine_boglehead
Posts: 228
Joined: Fri Feb 17, 2017 9:51 am
Location: Austria

Re: Low inflation caused by e-commerce?

Post by alpine_boglehead » Thu Jun 14, 2018 12:58 pm

I think technology will be the major force determining the circumstances in many areas of life in the decades to come.

E-commerce is just one of these areas. Education, the remaining manual and administrative work that is not yet automated, healthcare ... you name it.
So, my best guess is that inflation will have two sides: goods and services which can be produced and delivered ever more cheaply, and on the other side inherently limited resources (land comes to mind) getting more expensive as the planet gets more crowded and affluent.

Engineer250
Posts: 1045
Joined: Wed Jun 22, 2016 1:41 pm

Re: Low inflation caused by e-commerce?

Post by Engineer250 » Thu Jun 14, 2018 4:57 pm

Inflation is certainly picking up where I live. Gas has gone up 33% for me from a year ago. Coworker said their landlord just raised their rent 18%. Average raise at my Megacorp was about 2.5% this year.

There’s a reason core inflation includes the things it does. I don’t see any low inflation trend happening here, I see early signs of higher inflation.
Where the tides of fortune take us, no man can know.

rj49
Posts: 435
Joined: Wed Feb 23, 2011 12:22 am

Re: Low inflation caused by e-commerce?

Post by rj49 » Thu Jun 14, 2018 7:33 pm

Inflation is a personal matter, so official statistics won't have as much bearing on your individual retirement as the type of costs you face and your personal spending flexibility. For instance, if you are intending to put children through college, house your adult children, or rent a house or apartment, then you have a lot more inflation exposure than others. Health care is also the big unknown for retirees, since you don't know how much you'll need and how much will be covered in the future, so any cuts in benefits for health care or pensions act the same as inflation, as do increases in premiums or other cost-sharing. Even those costs, though, can be dwarfed by the financial costs of a divorce or someone feeling the need to spend on expensive toys--boats, RVs, vacation homes, sports cars, home projects, luxury vacations, and other things that bored retirees with too much time and money splurge on. If someone can't control their spending, then they're at much higher risks from inflation than someone who can make hedonistic adjustments to cope with inflation or market swings (keeping a car for longer, having a staycation, downsizing housing, or even picking up some extra cash through non-degrading work--i've been driving for Uber and Lyft for a year or so, which pays for European vacations and winter cruises and means I can largely counter increases in inflation or lower investment income).

User avatar
bottlecap
Posts: 5824
Joined: Tue Mar 06, 2007 11:21 pm
Location: Tennessee

Re: Low inflation caused by e-commerce?

Post by bottlecap » Thu Jun 14, 2018 8:09 pm

Honestly, CPI is not a great measure. An aggregate measure of the market price of a fixed basket of goods is not a great indicator of real life inflation.

I’d ignore it.

JT

Valuethinker
Posts: 36038
Joined: Fri May 11, 2007 11:07 am

Re: Low inflation caused by e-commerce?

Post by Valuethinker » Fri Jun 15, 2018 2:51 am

Top99% wrote:
Thu Jun 14, 2018 7:55 am
Valuethinker wrote:
Wed Jun 13, 2018 9:28 am

I would argue unskilled rather than skilled labour. Skilled labour is anything but in infinite supply. What became possible was a car assembled in Mexico of Chinese parts, or the mass migration of consumer goods production to China, which had a virtually infinite supply of biddable labour.

Skilled labour? 1 million Indian call centre workers, and say 300k IT outsourcers, yes (I'd have to check the numbers, those are wild-assed guesses), yes. But infinite? No.
A main point in the book I referenced is the *global* supply of college educated workers is growing extremely rapidly with no end to the growth in sight. Many of us in the US are already feeling the impact of this with wage growth lower than inflation since 2000 or so. I have access to the pay scale range data at my MegaCorp and with the exception of Silicon Valley the US ranges have moved up less than the inflation rate for quite a while now in spite of a tight labor market. And since MegaCorps benchmark against each other I think it is safe to assume this is fairly widespread, at least in technology.
I don't think it is, though. At least if we look at India, outside the top tier of universities (who really do count among the world's best) the higher education system is quite weak. We in the West tend to see the very best of the Chinese, Indians, etc-- but that's only a tiny sliver of the people out there.

India is one I have become aware of. We all know about China. What I am not seeing (maybe just not in the right places/ industries) is massive evidence of offshoring of industries that require skilled labour. Healthcare, for example - the largest single sector of the US economy.

There are demographics in play. Those countries have younger populations and therefore more new college graduates. But whilst some industries definitely have seen a lot of outsourcing (IT related especially) it's not universal.

It also mirrors the stats on the slowdown in the wage growth of college educated workers described in the book.
The number of skilled jobs that require US based skilled resources (IE can't be off-shored) is pretty small overall and will decline further as technology enables things like remotely controlled surgery. The rest can tap the (rapidly growing) global pool of college educated workers. So, given automation + a growing skilled global work force it is just hard for me to see wages putting much pressure on inflation. Overall I think this situation is situation is good because more people joining the middle class on a global basis will increase demand for goods and services without a commensurate rise in inflation.
I've come to think that the story about foreign competition and US workers is incomplete at best.

Or rather, it's true of manufacturing, maybe. US workers remain the world's most productive so there's definitely tradeoffs there -- you can go to China or Mexico, but your workforce is better in the USA. There will be "onshoring" but it will be to highly automated plants and processes and in particular things that need cheap energy-- that's going to be a US advantage for the foreseeable future due to fracking.

On services, though, you can find other developed countries (France), where the gap just hasn't widened like that. In other words, the labour market conditions we see in the US (stagnant median real wages) are a function of how the US economy is organized, and the share of the pie between bosses, capital and labour.

I wouldn't have written those lines 5 years ago, but due to various authors, I've started to see the pattern. There's a lot more work that has to be done to understand the causative factors.

Post Reply