Fears of post-pandemic inflation are exaggerated
Our market system is too focused on the immediate. This is true even for inflation debates. The data from last week showed that prices in the US rose at an unprecedented rate over 13 years. This has caused everyone, from restaurant and hotel owner to top investors, to worry about an overheated economy.
However, the hand-wringing may be premature. The early signs of rising costs are more indicative of an unpredicted, post-lockdown spike in animal spirits that any long term trend. As they did with personal protective gear in 2020, supply chain bottlenecks should soon disappear. As the spending boom ends, vacations and cars will be less popular. Waiters with high-paying jobs today might be outsourced to automated systems in the future. Just look at how many summer travelers already order their cocktails on an iPad.
We aren’t discussing enough — and it will prove to be far more important and difficult to predict — how technology and changing demographics will impact secular inflation trends. It is this that really matters to workers, businesses and the prices of assets.
First, consider the changes in where and how Americans live and work. People who once lived in the more expensive parts of the US, such as the west and south, are now moving to cheaper areas. They no longer need to be tied to their office. This is a new trend. People moving out of expensive New York City or Bay Area apartments tend to move to nearby suburbs or rural areas that are slightly less costly.
These shifts may not last for long, but it is anyone’s guess. Some urbanites, especially families with young children, may move out of cities if they can’t pay for education or public services. Others are returning to their hometowns, however. They can now go unrestricted to their favourite restaurants or the theatre.
This “migrationmania” is responsible for a 24% increase in home prices year over year. The lion’s share of US inflation was before the pandemic. It was measured as rents and rent equivalents. Daniel Alpert from Westwood Capital points out that “while home prices may fall if inflation continues and interest rates rise,” the “backfilling” of any decrease in other goods or services will come in rents.
We should not worry about inflation, according to the Fed. Things will settle down within six months after stimulus payments have ceased and summer’s surge has ended. As the 35tn-strong retiring boomers start giving their money to their kids, another wave may emerge.
This will cause a significant inflation, according to some. It’s money flowing out of the financial markets into real-economy spending, such as on housing, education, and healthcare. Some others believe this wealth transfer won’t cause inflation: the longer lifespans of boomers will mean that more savings will be available for retirement, while most of those remaining will go to those who are able to consume as much.
Is there anything that could slow inflation in the long-term? If more people produce goods and services, that will help to reduce inflation. Inflation rises when there is less demand than supply. These jobs should also be sufficiently lucrative to sustain consumption.
We are now at the heart of one of the most difficult long-term trends: The future of work. Digitalization has been accelerated by the pandemic. This will create a significant disinflationary effect in the global economic system, I believe.
During the pandemic, corporate investment in “intangible goods” such as software and intellectual property rose dramatically. McKinsey Consulting conducted a survey of executives last year and found that nearly three quarters expected such investment to increase over the next four-years. This is an increase of 55% from 2014 to 2019.
This type of investment increases productivity, but it also comes at the expense of jobs. And fewer jobs means less demand. This could be combined with digitalisation to drive down prices for goods and services like healthcare, education, and other essentials. These services, along with housing, are the main inflation-generating category among OECD nations, which includes the US.
Technology-driven productivity is therefore deflationary. This would also apply if more people were able to use these technologies in the workplace. Idealerweise, the government will invest in reskilling. Consumption could increase even if prices in healthcare and low-paid care jobs are converted to higher paid middle-income jobs. As boomers get older, the demand for this work is increasing rapidly. However, there are not many well-paid or productive jobs available.
This stimulus package by Joe Biden is designed to encourage investment in the “caring economic”. Let’s pray it passes. If nothing is done, then we might see more digitalized businesses that employ only few high-paid people. The cost of purchasing the goods and services that make up middle class life will also continue to increase.
Publiated at Sun, 18 July 2021 13:00:07 +0000