Price Competition: An Anchor on Inflation

Economic Blog Posted by lplresearch

Thursday, August 19, 2021

Much has been written on the prospects for sustained inflation over the next few years. While some are calling for inflation to be a problem, we are firmly outside that camp. We believe there are several structural considerations at play that will put downward pressure on prices over the medium to long-term. Demographics and global trade are two of those considerations. We also believe that more acute price competition is an important variable that can keep prices contained, and when current supply/demand imbalances are resolved we anticipate recently elevated price pressures could subside.

In our view, the ubiquitous use of the internet has indeed raised the price consciousness of the consumer. It has streamlined the price discovery process and has served to shift the pricing balance of power from producers to consumers. After all, investors can sift through prices for products and services without leaving their home. When the cost of price discovery comes down (thanks to internet ease of use), we believe consumers are more likely to engage in the search for the best price. We argue the behavioral elements of satisfaction derived from this enhanced price discovery process compels product producers to increasingly greet the consumer on his or her terms; whether that consumer purchases the good/service directly on the internet or not. The outcome is more marketplace knowledge for the consumer, a step-up in market power, and a producer that is compelled to compete on price to make the sale.

“We believe the internet’s existence as an epicenter of commerce has shifted the balance of power toward the consumer.  In our view, this phenomenon should serve as a long-term anchor on inflation,” explained LPL Director of Research Marc Zabicki.

The behavioral result is the consumer now derives satisfaction not only from the purchase of a good or service but also from the competitive price that is paid (an element of “retail therapy” if you will).  The combination of the good/service and the price has now become the new retail status symbol for many. We believe these consequences have forced producers to be more price competitive.

The products and services listed below have a definitive presence on the internet; illustrating the wide range of potential internet pricing influence on many CPI categories. Due in part to this effect, it is of little surprise to us that inflation has been benign for years, and we anticipate price pressures could again subside once COVID-19-related supply/demand imbalances run their course.

See enlarged chart.


This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

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All index data from Bloomberg.

This Research material was prepared by LPL Financial, LLC.

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