Is technology suffocating inflation?

Is technology suffocating inflation?

The world has seen low inflation ever since the Global Financial Crisis. Despite occasional warnings of inflationary pressures, worldwide inflation has remained substantially below historical averages. Central banks have increased their use of loose monetary policy and quantitative easing in an attempt to inflate global markets and, in some circumstances, avert outright deflation, but these interventions have proven increasingly ineffectual

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There have been numerous explanations for consistently low inflation, ranging from hidden labour market slack to globalisation, but one explanation that is gaining traction is the deflationary effect of new technologies. Technological innovations, from iPhones to Uber, are essentially deflationary in nature, as their entire goal is to enable the production and distribution of goods and services to be more efficient and cost effective. Nonetheless, these potent deflationary effects are ignored by official models. This is especially critical now because COVID-19 has accelerated the speed of digital disruption, enabling widespread adoption of technology in a variety of sectors, from education to healthcare

Inflation in New Zealand

A basket of goods and services worth $1.00 in 1980 would have cost $3.54 twenty years later, according to the Reserve Bank's inflation calculator. By comparison, a $1.00 basket in 2000 climbed by only 53 cents by 2020. When the Reserve Bank began targeting inflation, there was a significant decline in inflation. However, inflation has been readily kept below the "safe" 2% threshold since the GFC, despite low unemployment and a tight labour market, both of which are often associated with higher prices



From scarcity to plenty

Jeff Booth, a technology entrepreneur, recently published a book titled The Price of Tomorrow — Why Deflation Is the Key to an Abundant Future on the issue of technological deflation. He argues in it that our economic theories were not built for a digital society, but for a world in which labour and capital were inextricably linked, where growth and inflation were assumed, and where people made wealth by capitalising on shortages and inefficiencies

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Booth argues that as technological advancement enables us to accomplish more with less, we are transitioning from a scarcity-based environment to one of abundance. Meanwhile, technological breakthroughs such as artificial intelligence will affect virtually every sector of the economy, lowering inflation to the point where Central Banks will be unable to counteract the consequences through monetary policy. He points out that we can already see this happening, given that it required $185 trillion in debt to generate just $46 trillion in GDP growth over the last two decades

What is the remedy? Booth thinks that the solution is to allow deflationary forces to work and deal with the repercussions now, rather than suffering the greater implications of unwinding an ever-increasing debt burden later
Debt tsunami

Global debt has skyrocketed in the last two decades, with the Institute of International Finance forecasting that total global debt will reach $277 trillion, or three times global GDP, by the end of 2020. By 2020, the total amount of debt will have grown by $15 trillion. Global debt accumulation is occurring at such a rapid pace that the IFF has cautioned that it will be difficult for the globe to eliminate debt without suffering unfavourable economic effects

New Zealand's public debt is expected to reach 50% of GDP in 2024, a very low level in comparison to the advanced country average of close to 100% of GDP



The International Monetary Fund is the source

While the whole consequences of a deflationary post-COVID world is unknown, such high levels of debt paired with persistent deflation will make recovery from the pandemic much more difficult

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The implications of failing to address the persistent impact of deflation could lock Central Banks and governments in an endless cycle of market inflation via monetary and fiscal stimulation. What is certain is that the consequent ultra-low interest rates, combined with growing asset prices, will worsen the underlying structural inequities — and, indeed, social upheaval — that are evident in many parts of the world today