UBS: Amazon will drag on inflation in Australia

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One of the main impacts from Amazon’s entry into the Australian market may be lower inflation.

UBS economists George Tharenou, Scott Haslem and Jim Xu estimate that Amazon’s impact on prices in the retail sector could reduce headline inflation by 0.25%.

The analysts looked at the example of the US retail market since the global financial crisis in 2008.

Over the last nine years, retail prices in the US have only increased on average by 0.5% year-on-year. That compares to average annual growth in Australia of 1.5%, and with retail prices in the US continuing to fall the margin is now even wider.

Given the size of the retail industry in Australia (it’s the second-biggest employer in the country by sector), the UBS team said that retail price growth contributes around 0.4% to Australian CPI inflation.

That said, they noted that Australian retail price growth has been boosted by a surge in food prices which recently increased to 3% growth annually, while non-food items only grew by 0.25% to 0.5%.

“Nonetheless, we estimate that each 0.5% slowing of Australian retail prices would reduce headline CPI by around 0.15%,” they said.

So, on the basis that retail price growth in Australia follows the example of the US as shown in the chart above, UBS said that it would cut more than 0.25% from headline CPI.

In the event that retail price growth not only slows but falls, the reduction to CPI could be as high as 0.5%.

The analysts noted that retail demand now only makes up about one third of nominal domestic consumption, and the fall in demand is reflective of a broader pattern which has been underway for years.

“More recently, this reflects a sharper cyclical slowdown in retail sales to a trend of approximately 3% annually, which is only around half of the pre-GFC trend of 6% growth year-on-year,” they said .

Tharenou, Haslem and Xu considered the non-inflationary pressure from Amazon in the context of the broader economy. They noted the recent strength in Australian business conditions, and the favourable backdrop provided by signs of steady growth in the global economy.

However, they said that pressure on the retail sector in 2018 will combine with the negative impact from low household cash flow and a potential correction in housing construction.

Data at the end of July showed that headline inflation came in at 1.9% annually (missing forecasts of 2.2%) although underlying (core) inflation matched estimates with annual growth of 1.8%.

“The disinflation pressures from retail through 2018 should limit the RBA’s willingness to hike ahead of our forecast for a late-2018 start to normalisation,” UBS said.

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