During the recovery from the Great Recession, inflation did not reach the central bank’s 2 percent objective as quickly as many models had predicted. This coincided with increases in online shopping, which arguably made retail markets more contestable and damped retail inflation. This hypothesis is tested using data on the online share of retail sales, which are incorporated into an econometric model. Results imply that the rise of online retail has flattened the Phillips Curve, reducing the sensitivity of inflation to unemployment rate changes. Improvement in fit from just including the online share is tiny—so far. Other results indicate that market-based price indexes are more sensitive to unemployment than measures such as core PCE, which puts a sizable weight on items with imputed prices that may slowly adjust to market conditions. Further, measures of online sales that internalize substitution between online and traditional mail order sales better help track the impact of online sales on inflation dynamics.
A complementary factor is the “gig” economy and the rise of self-employment, which by reducing the bargaining power of labor, could lower the natural rate of unemployment. Model performance and fits are improved using a hybrid approach in which the rise of online sales can flatten the slope of the Phillips Curve by reducing retail pricing power and the prevalence of gig or self-employment can lower the natural rate of unemployment.
By omitting important structural changes in both goods and labor markets, conventional Phillips Curve models have failed to track how the rise of online retailing has flattened the Phillips Curve and how the rise of the gig economy (self-employment) has lowered the natural rate of unemployment. One notable difference between the price-price and wage-price results is that the combined effects of online shopping and self-employment are more notable on wage inflation than on price inflation. This could plausibly reflect that improvements in information technology may have undermined the pricing power of workers in labor markets to a greater degree than they have affected the pricing power of producers in goods markets.