[Kill the passive voice!! … the prof] Two opinions are considered with inflation. One being that the Fed must raise interest rates before we are confronted with runaway inflation, the other being that there is currently no inflation, thus the Fed should not act yet.
This article argues that one of the most important dynamics impacting inflation today is often left out of the equation–technology. Technology is reshaping the entire economic, social, inflation and investment landscape.
Further, technology:
- Creates transparency, generally leading 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 paper argues that years of technological progress in drilling has resulted in a dramatic slide in crude oil prices, thus serving as a deflationary force. In the chart below, the Eagle Ford oil field shows that yields can continue to drive forward despite a limited incremental investment. The paper names phenomenon this productive disinflation.
The article argues that as a result of this technological progress, the standard of living in the U.S can improve without a tangible increase in wages. Further, technology is dulling the increase in wages, despite tightness in many areas of the labor market today. Thus, according to this article, the middle class is reaping the benefits of technology without the any changes in monetary policy.’
http://www.blackrockblog.com/2015/03/16/inflation/?utm_medium=spredfast&utm_source=blktw&utm_content=blog&sf37009042=1
4 Comments
I wonder what effect expectations of future technical progress have on deflation? If people assume that we will see further improvements in the future, that could add additional disinflationary forces.
Another factor to consider in the interest rate debate is the unemployment level. Unemployment is near the assumed natural rate of unemployment according to FRED, suggesting a healthy economy.
Yes, but what of Robert Gordon’s paper? If changing technology does not lead to aggregate increases in productivity, then there is no macroeconomic impact. An economy is not static, and so if we cherry pick the data we can always find examples of industries doing well. To provide a counter, yesterday I visited a local dentist, and chatted for several minutes about technology. X-ray machines are better, the composites used for caps are better, lots of little changes. However, it still takes about the same time to do a filling or clean teeth, so labor productivity has not shifted over the course of that particular dentist’s 40 year career. And the US is a service economy, so that example matters.
This reminds me of the paper we read earlier in the term, that pointed out that the U.S. has already benefited from technology’s advancements. Computers are now mostly innovating how leisure is consumed, but not actually helping productivity, which may contradict the idea that it increases the standard of living.
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