Inflation's worst enemies? Innovation and adaptability
The accelerating and global use of new technologies are keeping prices in check.
In the wake of a global economy operating in deficit mode and our own Federal Reserve increasing money supply by 23% year-over-year (with no end in sight), why isn’t there a pick up in inflation (this morning's report on September consumer prices showed inflation continuing to run well below the Fed's 2% target)? There are many factors, but rapid innovation has played a crucial role.
In its simplest terms, inflation happens when demand outstrips supply. In order for prices to moderate or even decline, supply must catch up with demand—or even exceed it. And that’s what we’ve seen over the last decade or so, led by a combination of accelerating technological advances and an increasingly interlocked global trading network that brings together customers and suppliers across the world. Following are four factors we believe will be key to sustaining this low-inflation environment:
- Price transparency at a global level. Historically, “price shopping” involved physically visiting stores or calling various vendors to identify the best values. With the advent of real-time information on nearly every good, the price disparity between retailers, either online or in person, has all but been eliminated. Prices nationally or sometimes internationally are monitored every second in order to provide the best, lowest possible price or a commensurate uptick in services and/or convenience. The system has become so robust that frequently consumers don’t second guess the prices provided online if they include shipping.
- A vigorous innovation response. Throughout history, humans have countered high prices and market volatility with ingenuity. Electricity, specifically the lightbulb, was a response to lamp oil shortages in the late 1800s and significant price increases. In 2008, oil prices surged to an all-time high of more than $147 per barrel. That looming challenge to our energy needs for both industry and transportation accelerated technology behind hydraulic fracking and electric-powered vehicles, causing oil and natural gas prices to reverse and eventually crash, creating ecosystems of their own. The fracking renaissance, has made the United States energy independent, created millions of domestic jobs and arguably represents the greatest influence behind a U.S. manufacturing resurgence.
- Creative disruption. Automation has accompanied the launch of every new innovation from the printing press and steam engine to the computer and smart technology. Innovation through automation creates a chain reaction: some jobs get replaced, others are created as businesses change and the landscape adjusts. This process has led to increasing production efficiency and price decreases. For example, the price of a washing machine is some 84% lower today than it was in 1920, while air conditioners cost about 70% less than they did at their advent in 1952. Meanwhile, new technologies such as GPS, digital productivity suites and artificial intelligence are resulting in hundreds of billions of dollars in efficiencies. Think of the time and cost savings gained as companies, institutions and health-care providers have moved to digital accounting for payments, receipts, payroll, data collection and invoicing. The black swan event of Covid-19 has accelerated this shift—as Gold’s Gym and JC Penney have gone bankrupt, Peloton and a multitude of online retailers, restaurateurs and other service providers have experienced untold investment and growth. Technology and information sharing is supporting the development of coronavirus vaccines and treatments at unprecedented speed and efficiency. And it is only enormous advances in computing technology and its embrace by companies around the world that enabled a rapid and remarkably successful transition to remote operations at a very difficult time.
- A free and global marketplace. Eighteenth-century economist and philosopher Adam Smith famously illustrated the value of what we know today as global supply chains. He explained that if a pin maker was solely responsible for each step of the manufacturing process, he would be far less efficient than if he shared responsibility with experts at various stages of production. Tapping into global supply chains and information allows companies and consumers to become more efficient. Consider the tariffs that the Trump administration put on various goods from China. Within hours of the announcement, procurement officials across industries were able to source similar or sometimes identical goods from other countries and re-route those goods to avoid disruption. In some cases, the additional competition for new production sources brought down costs for numerous manufacturers as capacity quickly shifted from one place to another. Meanwhile, the software that many companies use to develop new products can produce mirror images of products that utilize other resources and commodities to save costs—for example, replacing steel frames with aluminum.
Whether it’s a move from the gramophone to Spotify, the horse and carriage to the Tesla Model 3 or from sulfa drugs to an mRNA-based coronavirus vaccine, the spirit of economic creativity is empowered and enabled by technology and free markets. These trends are nothing new but with today’s productivity advances and global connectivity, business decisions will continue to dampen inflation and likely keep it at bay even if the spending binge continues.