The European Central Bank, in line with expectations, did not raise the base interest rate as the inflation rate remains far below the targeted 2 percent.
Mario Draghi is trying to increase the inflation rate to reach the level of 2 percent, and thus the ECB persistently injects money into the market by purchasing government bonds, but the results are lacking if the price of oil is disregarded.
The situation is not better in Japan, as the central bank there has been massively printing and issuing money for years with the intention of raising the inflation rate to 2 percent, while prices remain surprisingly stable, writes DW.
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The inflation rate in June in the island nation this year was 0.8 percent, thanks to a drastic increase in oil prices. However, if this increase is disregarded, the inflation rate is 0.2 percent, which dangerously borders on deflation that central bankers fear. Their fear is justified because in that case, it is not worthwhile to invest, but rather to keep one’s own money.
Online Shopping Devours Inflation
One of the culprits whose actions cause the problems has been identified. It is online shopping, specifically Amazon, or online retail in general. This raises the question of whether we need to change our view of the entire economic structure of supply and demand where inflation would be part of these regularities.
As more and more consumers shop in the online market where few retailers can afford to raise prices, online shopping ‘devours’ between 0.1 and 0.2 percent of the price index, or inflation. Although inflation in theory is not the same as the price index, these two terms are increasingly used as synonyms. The basis for calculating the price index is the consumer basket, some elements of which can be purchased online, although for most of them, one needs to walk to a physical store.
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The largest item in the basket, oil, is precisely the one that cannot be purchased online. The fluctuation of oil prices on the global market thus leaves a gap in the inflation rate. Draghi insists that we should only observe pure inflation from which elements whose prices fluctuate rapidly, from food to oil, are excluded. In that case, inflation in the eurozone is far below the targeted level of 2 percent. Despite the fact that the ECB has so far purchased government bonds from eurozone countries worth more than two trillion euros, inflation has not materialized.
Online shopping systematically devours the consumption and profit chain because Amazon does not need to pay sales staff, invest in store arrangements, or spend money on opening new ones. Thus, consumer money goes directly into the hands of producers or importers, making it more valuable because more goods are obtained for less money, and thus less money is available. The question remains whether this can then be called deflation?
New Economic Theory
The chief economist of ING Diba bank believes that due to online shopping, inflation will continue to fall, potentially creating an even bigger problem, which is whether today’s central banks have the instruments to correct the inflation rate.
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The basics that every economics student knows say that the bank prints money, sets the base interest rate at which that money is released into the money market, and then also determines the reserve of commercial banks so that they can guarantee security, which has been significantly tightened after the recent financial crisis. The levers for higher inflation are at maximum because interest rates are negligible, and new money is being massively created, thus only oil somewhat saves the inflation rate.
The digital world and the economy as a whole will have to change the economists’ understanding related to classical forms of management, and as seen in the example of Japan and the ECB, perhaps even the understanding of the entire economy.
