It seems that almost every economic conversation these days excludes inflation. Each question seems to lead to another. Is it transient? Will it get worse? If so, when? And for how long? Which of the many factors – including rising demand for Covid-19, supply chain shortages, fiscal and monetary stimulus, energy policy, or all the many changes in how we live, work and play after pandemics – should matter most as we try to build a picture of what is happening?
In all the debate, one point gets very little discussion: the role of technology as probably the most important variable in what could happen to inflation over the next few years.
For every inflationary factor, from labor shortages to transportation bottlenecks, fuel costs, or even long-term pressures like an aging population, there is an impending technological change that could shift the calculation around prices in ways that are difficult to predict.
Consider the clean energy transition. The demand for electric vehicles is already pushing up the price of commodities such as copper, lithium, nickel and cobalt. Green vehicles and power plants are far more metal-intensive than the technology they replace. As more companies and nations move toward a carbon tax and seek to curb fossil fuel production, energy prices could rise further in the short term.
But the broader timeline is, of course, what matters. While a rapid transition to a cleaner world will cause some inflationary pressures, it will dramatically reduce the cost of climate-related disasters in the longer term.
What’s more, technological innovation itself ultimately lowers costs. Morgan Stanley data shows that commodity prices have been falling for 200 years, short-term rises aside. This is because every time one energy source became too expensive, a new one was invented to take its place.
We may be entering a cold and expensive winter. But given the declining costs of renewable technologies such as solar panels and wind farms (and increasing public and private investment in them), there is good reason to hope that the final destination could eventually be a much better and cheaper place – one that would dive into some of the 1970s stagflation analogies sit.
What about the inflationary aspects of supply chain delays? Some logistics experts believe port backups will last for years. And yet we are already seeing the biggest and richest companies (e.g. Amazon, Walmart and Costco) adapt to the problem with their own innovations.
Those innovations will include more vertical integration (for example, owning some of their own cargo containers rather than renting to allow more control), but also the use of artificial intelligence systems to better track deliveries. Autonomous vehicles, both trucks and ships, are getting a new boost of interest. The first autonomous container ship will be tested in Norway by the end of the year. If such systems smooth traffic, some supply chain related delays and price pressures will begin to decrease.
As the Internet of Things becomes ubiquitous, more companies will use new technology to improve efficiency. As the CEO of Ark Investment Management, Cathie Wood, noted in a recent interview, such innovations, which include autonomous mobility, blockchain, gene editing, adaptive robots and neural networks, are more likely to usher in a period of longer-term inflation than inflation, given the depth and breadth of their impact on all areas of business.
It will certainly disrupt labor markets in ways we cannot yet imagine. For example, technology can play an important role in reducing the inflationary pressures of aging baby boomers, which will require more care at exactly the time when the workforce is shrinking, by increasing the productivity of existing healthcare workers and the system.
China, which has invested $ 1.5 billion in the use of big data in healthcare over the past decade (and many billions more in artificial intelligence), is likely to be the epicenter of AI-driven diagnostics and healthcare innovation.
The politics of using big data in sensitive areas such as healthcare and finance will, of course, differ from country to country, as regulators struggle with the social implications of such cutting-edge technologies. Those differences in national policies can themselves be inflationary if they contribute to cross-border frictions in global business and when it comes to the movement of people, goods and capital.
In a multipolar world, there will inevitably be more delays, shortages and supply and demand disparities in the short term.
And yet, the fact that the world economy has become somewhat more fragmented over the past few years is also an opportunity for technology-driven innovation that could eventually bring prices down. Think about vertical farms what products grow minutes from where people eat them, telehealth and virtual education platforms that eliminate travel costs, and 3D manufacturing that cuts through complex and distant supply chains.
These are just a handful of the many new technologies that are currently flourishing. The change that such innovation can bring is probably the only major disinflationary trend at present. But it may be the most powerful.