As investors fret over rising inflation measures, how is it that Federal Reserve Governor Frederic S. Mishkin matter-of-factly states, “By a range of measures, longer-run inflation expectations appear to have remained reasonably well contained even as recent readings on headline inflation have been elevated.”1
To be sure, his justification, “I expect inflation pressures to wane over the next few years, as product and labor markets soften and the rise in food and energy prices
abates,”2 does resonate from the standard economic prescription. But, as I see it, there might be other forces not cited by Governor Mishikin—but equally powerful—at work. The growing use of the internet as a marketplace for buying and selling products has challenged conventional models of supply-demand pricing structures (i.e. inflation as measured in the Consumer Price Index) and created new implications for inflation expectations.
In just a few short years, internet auction sites have become the perfect price-discovery marketplace.3 Through the internet, buyers and sellers now gain instantaneous access to heretofore unavailable pricing information. And, because the internet has no geographical or artificial boundaries, the rationale for pricing differences on various items becomes completely transparent to buyers, sellers and even those who are only window shopping.
Furthermore, as technological advances enhance the public’s ability to seek best prices over the internet, growth in internet-based shopping, appears unbounded, as the accompanying chart seemingly attests.4
As such, with nearly perfect price information available on a large scale, it stands to reason that merchant pricing power is now less than it once was. Consequently, I believe we can logically expect inflation to mitigate over time and, by connection, inflation expectations.
But that is not to say price volatility will be eliminated. Unquestionably, scarcity or demand shifts can—and will—still cause price spikes. However, I’m comfortable suggesting that the internet also facilitates the restoration of price stability. In other words, such price spikes are likely short-lived as sellers quickly discover price discrepancies and adjust supply accordingly, thereby keeping inflationary expectations well contained.
The internet is changing business models around the world as it enables customers to shift away from price takers toward becoming price makers. As such, I believe, it is also changing the way investors think about inflation expectations.
1 Mishkin, Frederic S., “Outlook and Risks for the U.S. Economy,” speech at the National Association for Business Economics Washington Policy Conference, Washington, D.C., March 4, 2008, page 5. Available at http://www.federalreserve.gov/newsevents/speech/mishkin20080304a.htm
2
Mishkin, page 6
3 Auctions—whether traditional or online—help allocate goods between buyers and sellers. The basic premise of an auction is relatively simple. The seller wishes to secure the highest price, while the buyer wants to pay the minimum amount necessary to obtain the item. Yet, in an auction, no bidder can ever be certain of the worth of the good being auctioned.
The buyer with the winning bid is neither the neediest nor the most informed bidder. Rather, the successful bidder is merely the one buyer who made the highest guess at, essentially, the market-clearing price. However, if all the bidders have at their disposal reasonable information on the value of the item, then the market-clearing price is likely correct.
4 Chart E0149 E-Commerce Sales 12/31/1999-12/31/07, Ned Davis Research, Inc., ©2008
This material has been prepared using sources of information generally believed to be reliable. No representation can be made as to its
accuracy. The forecasts and opinions in this piece are not necessarily those of Van Kampen, and may not actually come to pass. Information
in this report does not pertain to any Van Kampen product and is not a solicitation for any product.
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