Inflation's New Adversary

The Web is only starting to bite

With global growth picking up steam, you might think America's remarkable disinflationary performance at retail counters is finally headed for rough waters. Not necessarily, claim economists Ethan S. Harris and Joseph T. Abate of Lehman Brothers Inc. The advent of e-commerce, they say, is the latest stage in a continuing revolution in retailing that could keep a tight rein on prices for years to come.

The first stage of that revolution was begun earlier in the decade with the proliferation of high-volume discount stores, heightened competition, and a growing "buy only on sale" mentality among consumers. Its impact was most apparent in the general merchandise, apparel, and furniture sector, where prices have been falling at an accelerated pace since 1994.

Now commerce on the Internet is adding a new layer of competition and squeezing per-unit profits further, while providing an even more cost-efficient mode of distribution. Although e-commerce likely accounted for less than 1% of total retail sales last year, Harris and Abate point out that nearly every item that can be purchased at a traditional retail store is available on the Web, and sales volume is doubling every year.

For cost-conscious consumers, the trend adds up to unparalleled leverage, as buyers can comparison-shop across dozens of stores at the click of a mouse. For sellers, savings comE via lower real estate and rental costs, and reduced outlays for advertising, inventory, and transportation--items that ordinarily account for some 38% of the consumer price of goods, according to one study.

So how much can consumers save currently? A Lehman Brothers survey recently compared e-commerce prices of over 100 retail items with those in moderately priced retail outlets in the New York area. On average, they found that goods cost about 13% less on the Net.

But that's only a hint of deflationary pressures to come, say Harris and Abate. They note that many traditional retailers initially sell on the Web with little or no discount, since they don't want to undercut their own stores. Eventually, however, competition forces them to pass on the savings.

Books are a case in point. Last year, only 3% of books were sold online (where they cost about 20% less than in shops), and book prices tracked by the Bureau of Labor Statistics were still rising. But this year, they are falling at a 4% annual rate--partly because the BLS has apparently started to sample online sellers, but mainly because Internet competition is affecting traditional sellers.

Looking ahead, the two economists thinkother products will also see prices drop as Net sales build. By 2002, they expect consumer inflation to be running about half a percentage point below what it would have been without the downward pull coming from e-commerce.

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