There's a hole in the theory that the 'Amazon effect' is keeping US inflation down

• Fed officials puzzled by low inflation have looked to the impact of technology as a potential culprit.
• There may be an "Amazon effect" on the US economy, but it's not to blame for low US inflation, according to bank lobby IIF.

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Online shopping may be convenient, and may even lower prices on some items, for some consumers.

That has led to some debate among economists about what exactly the "Amazon effect" on the US economy might be, including the possibility that online retailers might be to blame for some of the low inflation trend that has befuddled Federal Reserve officials, who set US interest rates based on their forcasts of inflation.

Federal Reserve Chair Janet Yellen nodded somewhat skeptically to the recent debate in a September speech.

"Speculatively, changes in the structure of the domestic economy may also be altering inflation dynamics in ways not captured by conventional models," she said. "The growing importance of online shopping, by increasing the competitiveness of the US retail sector, may have reduced price margins and restrained the ability of firms to raise prices in response to rising demand."

In a recent interview with Business Insider, St. Louis Fed President James Bullard also said he was willing to consider technology as a factor in keeping prices down.

"I am open to ideas of technology being a driving force," he said. "Technology is becoming a more important part of the economy, a bigger share of the economy, and we know something about tech prices, they decline over time, they've been declining for decades. I could see that as a disinflationary force."

But that doesn't mean the effects are large enough to account for chronically low US inflation, which has fallen short of the Federal Reserve's 2% target for several years now, according to Jonathan Fortun, a senior research analyst at the International Institute of Finance, a global banking lobby in Washington.

He downplayed the notion that "structural changes in the economy are holding down momentum, something that by some has been called the 'Amazon effect.'"

"We build on our previous analysis of [inflation] dynamics and find that there is no such shift," he writes in a research note.

The basic idea is that even if online shopping lowers prices and cost on a one-time basis, this should not have an ongoing effect on inflation, which is a measurement of price increases over time.

"Idiosyncratic one-off shocks can be expected to hold down year-over-year inflation for some time, but they should not impact the distribution of month-over-month inflation outcomes," Fortun adds. "There has not been a significant shift in the distribution of prices across time."

This leads him to forecast, as the Fed has, that inflation will resume its upward trend next year after a decline in 2017 that took many economists, including Fed Chair Janet Yellen, by surprise.