Everyone knows you can save lots of money from shopping online. But how much? Are those savings big enough to shift the macroeconomic dials on inflation and interest rates? Who in the community benefits most?
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To find out, our team at Mandala collected data on more than 60,000 products from a range of online retailers, including the price and characteristics of each product.
We then categorised and weighted all these products in the same way that the Australian Bureau of Statistics does for the consumer price index - the measure economists use for what inflation is doing across the economy.
This allowed us to do a direct comparison between the prices of products online versus the prices of products across the entire economy. We did this comparison for the 2019 to 2023 period - the period in which Australia has seen prices (and cost-of-living pressures) skyrocket.
What did we find?
While the prices of goods and services across the economy inflated over this period - increasing by almost 8 per cent from 2019 - the prices of goods and services online deflated by almost 3 per cent.
This isn't small change, either. For the average Australian household, this is a saving of $3463 over the period - the equivalent of getting three weeks' worth of groceries for free each year since 2019.
These cost savings were largest for recreation and culture (think: toys, stationery), where households have saved nearly $1000 in the last five years.
Turns out, online channels are cheaper because of two effects.
There is a "cost-efficiency" effect whereby retailers that operate purely online save money through reduced rent, reduced in-store handling, centralised inventory management and reduced cost of sales.
And there is a "competition effect" where prices are pushed down by the increased competition that comes from more retailers offering consumers more options.
These effects are significant. We found that the prices of products online grew a whopping 10.5 per cent slower than for the rest of the economy.
It's not just that the prices of online products grew slower than those offline. They actually declined.
There's a macro story here, too. After all, lower prices mean lower inflation, and lower inflation means lower interest rates.
How substantial are these effects? Our modelling finds that in every year since 2021, annual inflation was 0.7 percentage points lower due to competitive pressures from the growth in online retail channels.
Interest rates are lower thanks to online retail channels, too. Our modelling shows that reducing inflation 0.7 percentage points means the Reserve Bank's cash rate would be 0.5 percentage points lower.
This is the equivalent of avoiding two interest rate increases which, for the average owner-occupier mortgage in Australia (which is about $585,000), translates to up to $2925 in saved annual interest payments.
So, who gets these benefits?
Most statistics suggest that people on higher incomes spend more money online than people on lower incomes. But this misses the point. The question isn't how much rich people save compared to poor people, it's how much they save as a portion of their disposable income.
We find that households in the lowest quintile of income saved nearly double that of the highest income quintile, relative to their annual disposable income.
If households did more of their shopping online, they'd save even more. About 11 per cent of household purchases are currently made online. If this was to double, households would have saved $6344 since 2019.
All of this might sound technical and academic. But the cost-of-living crisis in Australia is real, and is really hurting.
Households have struggled to buy essential items. Charities have been in overdrive to help people in need.
Many point to the fact that inflation is starting to decline in Australia, and this is a good thing. But it also misses the point. Lower inflation today doesn't give you a refund on the higher prices yesterday's inflation has already caused.
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Put simply, prices across the economy have grown almost 20 per cent since 2019. On an annualised basis, transport costs have grown 8 per cent a year, housing has grown 6.9 per cent and food and non-alcoholic beverages have grown 5.1 per cent.
Even if inflation was zero now, prices would still be almost a fifth higher than they used to be. Easing inflation just means less fuel is being thrown on the fire.
The message for policymakers from this analysis is simple: competition is a good thing, and online retail channels provide a lot of it.
People in remote and regional communities, in particular, often have little choice when it comes to their retail options - meaning many retailers can enjoy significant market power. Online retail channels give them options. And with options comes competition, lower prices and more innovation.
So, the next time your partner complains about how much you spend online, you've got an answer ready to go: you're just doing your part to ease inflation in Australia.
- Adam Triggs is a partner at the economics advisory firm, Mandala, a visiting fellow at the ANU Crawford School and a non-resident fellow at the Brookings Institution
Adam Triggs
Adam Triggs is a partner at the economics advisory firm, Mandala, a visiting fellow at the ANU Crawford School and a non-resident fellow at the Brookings Institution.
Adam Triggs is a partner at the economics advisory firm, Mandala, a visiting fellow at the ANU Crawford School and a non-resident fellow at the Brookings Institution.
