E-commerce fuels inflation

Digital markets help businesses to change price easily.

Before the pandemic, e-commerce was a common way to shop. Now it is even more popular as past restrictions on freedom of movement to stop Coronavirus forced reluctant and elderly old people to use it. As the share of e-commerce grows, its effects are becoming more visible. Among them is higher inflation, as electronic instruments allow online vendors to easily change the price.

Traditionally, it is difficult for physical store managers to modify prices. If a restaurant wants to change them, it has to reprint all its menus and the process can be very expensive. The cost that a business faces when it plans to change its pricing is called by economists “menu cost”. Given the difficulties and the amount of time and money it requires, businesses can be reluctant to frequently change prices.

But today, it is much easier to change princes thanks to technology and the transformations caused by the pandemic. Restaurants have often Qr code-menus, which can be easily changed online in just a few minutes. Many brick-and-mortar stores now have digital displays rather than plastic or paper price tags, which can be modified on a computer. E-commerce stores’ prices are easily changeable, too. As these elements make prices more flexible, they can be passed on from vendors to customers more easily, leading to faster inflation. It can be more visible during times of strong pressure on prices, such as now.

In the last 10-15 years, Europe has faced deflation and in that situation many experts said that e-commerce was part of the reasons. That is because e-commerce expands the supply, allows easy comparisons among objects and markets and decreases the cost of goods. In 2015, Ecb noted that e-commerce accounts only little for the price decrease.

It also said that as the popularity of e-commerce grows. its effect will have to be re-evaluated.

Now, the situation in Europe is totally different, with high inflation running up to 6% year on year. The main reasons for this hike are supply chain disruptions, energy shortage and a war on Europe’s eastern border. And these problems are likely to stay. In this context the new flexibility of prices represents another element which can lead to inflation enduring.