The One Thing You Need to Know About Inflation: impact of Tech on Productivity
All too often left out of these arguments is mention of perhaps the most important dynamic impacting inflation today: technology. Put simply, technology is reshaping the entire economic, social, inflation and investment landscape. And some of the benefits, especially to the U.S., are profound.
Consider the smartphone. In one device you now have the capabilities that would require the purchase of a dozen or more devices years ago, and at a significant savings. After all, have you bought a tape recorder recently? Or a compass?
The impact of this technological revolution on the economy is mindboggling. Technology:
Creates transparency, which generally leads to price wars;
Reduces the total cost of labor;
Enhances distribution and logistics;
Creates production efficiencies in multiple forms;
Enables the development of asset-light businesses;
Improves the standard of living.
The combined effect of all of these developments is staggering, and not only in places where you would expect it. Indeed, when you think “high tech,” the last place that might come to mind is an oil field. But the application of technology as a deflationary force is nowhere more apparent than in the energy industry. Without question, horizontal fracking is one of the great new technologies of our era.
Years of technological progress in drilling has resulted in a dramatic slide in crude oil prices. The Eagle Ford oil field is a microcosm of the shale revolution – production has continued to grow despite the rig count having peaked more than two years ago. That’s a powerful combination: limited incremental investment or working capital is required, but the yield continues to drive forward. That’s called productive disinflation, and it’s happening in many different sectors of the economy.
The implications of this phenomenon on monetary policy are enormous. The standard of living in the U.S. can actually improve without a tangible increase in wages. In fact, the technology revolution is dulling the increase in wages, despite clear tightness in many parts of the labor market today. However, net disposable income can increase because of the lack of inflation