Digitalization affects inflation through pricing behavior and market dynamics: RBI

New Delhi (India), July 29 (ANI): The Reserve Bank of India (RBI) report on Currency and Finance has highlighted how digitalization is affecting the price level through direct and indirect channels. The report states that the growing impact of digitalization is transforming the production and consumption patterns of economic entities.

Digitalization affects price elasticity, the relative prices of online and offline products, market competition and market concentration.

In the direct channel, digitalization is contributing to lower inflation rates through falling prices of ICT-related goods, a trend that has been observed in the post-pandemic period with regard to hardware and software prices in India.

Digital technologies also indirectly affect inflation by changing firms’ pricing behavior and market dynamics. New players increase competition through e-commerce.

Digitalization can also help reduce menu costs because product prices can be changed almost without the cost of reprinting price tags or redefining pricing strategies.

The RBI report points out that dynamic pricing of goods and services is becoming possible thanks to digital technologies that make prices more responsive to economic changes by reducing menu costs, improving access to information and increasing the flexibility of price updates.

Citing examples of price changes in vegetables and grocery items, the report said that on online platforms in India, these changes occur once in two and three days respectively, which is much more frequent than the corresponding offline price changes.

As Internet penetration increases, we can expect a corresponding increase in the number of retail purchases made via digital technologies and the number of consumers using digital technologies and online shoppers.

The growth of digital engagement, coupled with increased price and information transparency, could also put downward pressure on prices by reducing the costs of search, replication, transportation, tracking and verification.

Moreover, digitalization can improve access to financial services, and increased financial inclusion improves the transmission of interest-based monetary policy impulses.

Research results show that monetary policy can be more effective in curbing inflation in the age of digitalization.

Digitalization also has implications for the primary objective of monetary policy, which is to manage inflation.

Information costs have changed significantly under the influence of digitalization. Digital tools such as search engines, e-commerce platforms, and social media significantly reduce the time and energy costs for consumers to obtain information, compare prices, and make purchasing decisions, thereby changing the process of price formation and adjustment.

These changes could make monetary policy more effective in securing price stability. A decrease in price stickiness could weaken the effectiveness of monetary policy.

In this environment, central banks will need to comprehensively incorporate digitalization aspects into their models to ensure monetary policy remains effective and to achieve their price and financial stability goals. (ANI)