Can Tech Keep Rising Inflation at Bay?
The role of new innovations in economic recovery
Pre-pandemic, mainstream news was full of stories on how and why innovative technology helps contain inflation. But inflation is a balancing act. If prices rise over time but comparable wages do not, that leads to reduced buying power and increased inflation. Inflation that is chronically too low hampers monetary policy, resulting in less scope to support economic growth and create jobs.
For more than a decade, technology has served to de-inflate prices and keep inflation in check in several ways, including by creating efficiencies in manufacturing and reducing labor costs. Then came COVID-19.
First, we saw prices fall and inflation shrink to historic lows. As recovery takes hold, we are seeing higher prices in certain sectors, but labor and wages have not caught up. While there is strong concern that rising inflation may cause a major disruption, there are also indicators it may be short-lived. Where we are at with major technology development may be an important part of our economic recovery.
According to the United Nations 2021 Technology and Innovation Report, whole economies and societies are being reshaped by rapid technological change. This includes frontier technologies that expand each other’s functionalities. The report gives these examples:
“AI uses big data securely stored in blockchains to improve predictions using machine learning. An increasing number of devices connected within an IoT network are data collection tools that contribute to building up big data. 3D printing can create more complex items that require more data by leveraging big data, and items can be printed remotely through IoT with AI-enabled defect detection functions.
Industrial robots assist 3D printing at various production stages such as replacing a printer’s build plate, and washing, curing, and final finishing of additively manufactured parts. 5G has the potential to allow near-instantaneous response for robots by dramatically shortening response times.”
Technological innovation shows no sign of slowing down. The question is will it still serve its role in curbing inflation?
Let’s take a step back and look at technology’s past relationship to inflation, then examine why top economists theorize that a post pandemic rise in inflation may be temporary.
History of technology as a de-inflationary factor
In 1965, Intel Co-founder Gordon Moore made a prediction that would set the pace for the digital revolution to come. Now known as Moore’s Law, he envisioned that computing would dramatically increase in power, and decrease in relative cost, at an exponential pace. Through observation Moore noted that the number of transistors in a dense integrated circuit doubles about every two years. Moore’s Law has become synonymous with more powerful and cheaper technologies.
The federal government targets inflation at 2% per year to keep things in balance. Pre-pandemic, inflation fell short of this goal because of technology. Alan Greenspan explained it this way in testimony before the U.S. Congress in 2005: “The past decade of low inflation and solid economic growth in the United States and in many other countries around the world … is attributable to the remarkable confluence of innovations that spawned new computer, telecommunication, and networking technologies, which, especially in the United States, have elevated the growth of productivity, suppressed unit labor costs, and helped to contain inflationary pressures.”
Scholarly research about the impact of technology on inflation can be sorted into three categories.
1. Technological innovation has reduced prices for communications and IT.
A direct impact on the changes in the prices of information and communication technologies led to continued decline in the prices of computers and home electronics. The price of some information and communications technology (ICT) products has rapidly decreased from the 1990s onward, because of technological advancements.
2. Technology has an impact on competition and market structure.
As technology becomes more accessible, barriers for new company creation in many areas are reduced. Market competition is exacerbated and prices are affected. E-commerce is a good example of how digitalization can increase competitiveness and influence inflation. Online technologies have changed the face of how consumers search for products and compare prices. Research on the impact of e-commerce on inflation shows that the internet improves productivity and reduces inflation. Virtually any size company can now reach a global audience faster and more efficiently than ever before.
3. Technology increases productivity but also lowers the rate of wage growth.
For example, jobs could be replaced by automation, or in other areas technology could enhance production. Higher productivity translates to lower production costs. If policy-makers can tolerate temporary lower inflation rates, prices will be lower, with no long-term impact on inflation. Consumer demand is suppressed by higher availability of goods, which has deflationary effects.
The last bit of historical information does not directly connect to technology. However, a research study going back to the 1300s on the effects of wars and pandemics on inflation show that wars do cause a rise in inflation while pandemics do not.
Upcoming inflation outlook
As the country recovered from the Great Recession, inflation has been lower than the Federal Reserve’s target. Inflation then fell further as Personal Consumption Expenditure (PCE) declined during COVID-19.
A report released in April 2021 by the White House titled Pandemic Prices: Assessing Inflation in the Months and Years Ahead predicts we will see increased inflation over the next several months as a result of “three different temporary factors: base effects, supply chain disruptions, and pent-up demand, especially for services. We expect these three factors will likely be transitory, and that their impact should fade over time as the economy recovers from the pandemic.” In this instance, base effects refer to the fact that inflation was already low, then decreased more at the beginning of the pandemic before beginning to rise more recently.
On the technology end, the global semiconductor shortage is not helping supply chain problems. Chips are used in just about everything now, from smartphones and computers to appliances and automobiles, causing product shortages. We’ll dive more into that in a separate article.
Pent up demand is an area economists point as the primary factor in our sudden overheated economy. There is too much money sloshing around and not enough product and services (or people in jobs) to meet demand. But there are as many “experts” raising alarm bells as there are those saying increased inflation will be temporary. Pick a side, cross your fingers and see what happens.
Technology is deflationary primarily because it allows the production of goods and services to scale efficiently. If an overheated economy and misdirected corrective measures do cause rampant inflation as we wind down the COVID-19 crisis, the exponential growth in pioneering technology may be our greatest hope to reign inflation back in.
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