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Why The Amazon Effect Complicates The Fed’s Interest Rate Decisions

The ability and tendency of the average American consumer to hit the web to purchase goods or at least research them and their price has created something for a difficulty for the Federal Reserve as it contemplates whether and how much to increase the benchmark short-term interest rate.

The wide expectation on Wednesday (Dec 13) is that the Fed will announced an increase to the rate of a quarter percentage point — to 1.25-1.5 percent. Officials will also release their latest projections for the likely path of rates in the years ahead, which will influence mortgages, credit cards and other consumer loans, business borrowing and global financial markets.

But those decisions on when and how to throw the levers of interest rate increases is getting increasingly tricky as consumers are shopping online, insisting on finding the best price — and keeping a perennial lid on what merchants can charge on a whole host of goods. The net effect, according to Wall Street Journal reports, is to push down inflation.

Overall, according to reports, prices on a range of consumer goods including clothes, shoes, household appliances, sporting goods and many forms of electronic pastimes have been falling.

The Fed, and its European and Japanese counterparts, would like to see inflation rise to an annual rate of around 2%, considered a healthy level for spending, business investment and higher wages. With the U.S. economy expanding and showing very low unemployment, an interest-rate increase would help forestall asset bubbles or other financial dangers. And while there is momentum to continue raising the shorter term rate to prevent economic overheating in the more active economy of late — there is also some puzzlement as to why the inflation rate is running so far below the targeted 2 percent.

Some Fed officials have argued for holding rates low a bit longer to give inflation a nudge. Most, though, want to raise them.

Fed Chair Janet Yellen said in September that increased competition created by online retailers “may have reduced price margins and restrained the ability of firms to raise prices in response to rising demand.”

In October, she noted that online shopping “could be helping to hold down inflation in a persistent way in many countries.” The Bank of Japan in has attributed part of the price declines at supermarkets to online shopping.

Research by Goldman Sachs found that online price competition may be subtracting as much as a tenth of a percentage point from core inflation — which strips out volatile energy and food prices — and quarter of a percentage point from core-goods inflation, as measured by the personal-consumption expenditures index.

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