Amazon Vs. The Fed: Experts Fear Whole Foods Deal Will Kill Inflation With Economic Ripple Effect

The Federal Reserve’s June 14 report heralded a tightening of monetary policy and gradual rate hikes to achieve the Federal Open Market Committee’s 2-percent inflation goal.

But any excitement surrounding the news was quickly neutralized by Amazon.com, Inc. AMZN’s acquisition of Whole Foods Market, Inc. WFM. The deal’s announcement triggered an immediate dive in grocery and retail stocks.

“That normally indicates that somebody thinks that they are not going to be earning as much as they were,” Federal Reserve Bank of Chicago President Charles Evans told the press Monday.

The Counterbalance

The effects could be more expansive as the deal plays out.

Amazon CEO Jeff Bezos is reportedly considering a cut to Whole Food prices, which some experts worry could pressure price drops among rivals, such as Wal-Mart Stores Inc WMT or Costco Wholesale Corporation COST, trigger an industry-wide decline in U.S. grocery prices and subsequently thwart planned inflation.

The FOMC’s rate activity is predicated on a tightening labor market, which should prompt wage hikes that heighten inflation. But plunging product prices could limit the capacity of firms to raise employee pay, thus stunting the conditions justifying the Fed’s strategy.

“New partners are choosing to merge and sort of changing the marketplace and [bringing] more competitive pressures on price margins,” Evans said on CNBC’s Squawk on the Street without directly mentioning the specific transaction.

With the grocery market valued at $800 billion, some fear the Whole Foods deal could cause a ripple.

Enduring Optimism

However, not everyone believes in Amazon’s imposing power.

"With respect to the Amazon-Whole Foods merger, I think it's premature to anticipate a deflationary surge via grocery prices based on Amazon's ability to ship units of goods to customers," Joe Brusuelas, chief economist at RSM, told CNBC. "This is a foray into a highly volatile industry, based on commodity prices, which are immune to Amazon's ability to shape a supply chain."

Related Links:

Winners And Losers From Amazon’s Purchase Of Whole Foods

Fed Meeting Ahead: How Inflation Impacts Interest Rates And Bonds