Study on the impact of e-commerce development on inflation in the euro area

Economic & mathematical methods and models

This article explores the impact of e-commerce development on inflation in the euro area. Low inflation in the euro area has been a concern for policymakers since the global economic crisis. Economic growth and inflation have recovered in many countries, but in the euro area, growth has remained sluggish and inflation low. As a result, to reach its inflation target the European Central Bank cut its policy rate to zero and implemented several non-standard monetary measures. The possible cause of the disinflation could be digitalization and e-commerce development. With the development of digital technology and the internet, company competition may increase, and costs will decrease. The main hypothesis of the study is that the developing e-commerce sector may channel into lower
consumer inflation. The e-commerce development was measured by two indicators, namely a share of online purchases by individuals and a share of purchases by enterprises via a computer network. To evaluate the impact of e-commerce, a panel database on 19 euro area countries was compiled. Initially, a cross country analysis shows no negative relationship between e-commerce development measures and inflation. However, a basic linear panel model with fixed effects and a panel vector autoregression showed negative impact of e-commerce development and digitalization on inflation. As a result of a panel analysis, the hypothesis of the disinflationary impact of e-commerce was generally confirmed. However, given a weak relationship between e-commerce development and inflation in a basic crosscountry analysis, the negative relationship was likely attributable to the ongoing upward e-commerce development trend. The trend has a natural cap of 100%, meaning that this disinflationary factor will eventually fade away. For many countries, in 2019, the share of online purchases by the population was below 50%. Should the trend stop, inflation in the euro area may accelerate. Among other factors hindering the e-commerce development and digitalization are tighter information technology regulation and worsening international trade relations.