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Technology Is Eating Inflation

Apr. 04, 2021 9:52 PM ETTLT31 Comments


  • Technology is deflationary primarily because it allows the production of goods and services to scale efficiently.
  • Long-term price inflation of a particular good or service becomes an impossibility when the production of that good or service can scale to meet 100% of current and future demand.
  • As technology enables more and more industries to reach that inflection point, there will be less and less price inflation across the market as a whole.
  • Short bursts of industry-specific inflation may continue to occur, but I predict that they will be less severe and last for shorter lengths of time.
  • I am not worried about sustained long-term inflation, even if the government continues to provide direct financial assistance to millions of Americans.

Turning the dice and changing the word DEFLATION to INFLATION
Photo by LuismiCSS/iStock via Getty Images

I hypothesize that we are unlikely to see meaningful long-term consumer price inflation, even in light of a dovish Federal Reserve and fiscal stimulus. My reasoning is as follows: technology is deflationary. Technology is deflationary primarily because it allows the production of goods and

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Comments (31)

Hi, I too agree that Technology has a deflationary affect, however recently due to supply chain issues and material shortage the prices of chips and other hardware are also increasing. I believe that the supply chain issues are temporary and will be sorted at some point, however what if the material shortage remain. After all rare earth metals will get more expensive and countries having those minerals will try to monopolise them. Would be glad to hear your thoughts. Thank you.
04 Dec. 2021
I agree with basically everything you say but regarding inflation i think central banks still would be able to ensure inflation while living standards are basically paid by the state with basic income, society will shift to other values which seem tradable and in limited supply. In my opinion those "tradable" values will be health time and social status like owning a limited object of desire (elon musk NFT of his first mars mission or something like that). But as you said is is difficult to forecast habits and social order with new disruptive technologies and because of AI and human brain interface prolonged health through genetics behavior of future generations is not pretictable and thus also not the value it attributes to goods and services. Shortterm next 20 years i dont agree either because even though scaling of commodities could scale making them CO2 neutral and recycle everything and meet demand of poor countries too i dont see the full extent of this deflationary pressure play out to the extent of no inflation.
Summary: long term i agree that value will attributed different than nowadays but i think it is impossible to guess.
short term: i think mainly the fight for a sustainable future will hinder scalabilty of commodities due to limited ressources earth has and americans use 6 times the earth ressources we could sustainably attribute to them. I think we could achieve this scalabilty with conventional means but not with sustainability in mind. But as general tendency i completely agree with the deflationary effect technology has on our habits and service prices.
No Called Strikes Investing profile picture
@erebos Thanks for checking out the article and for the detailed comment. It is interesting that you see sustainability improvements as inflationary (at least in the commodity space) rather than deflationary. To me, I would think on balance these types of changes would in total lead to lower costs, not higher costs. Energy costs in particular seem likely to go lower as solar, wind, and other alternatives get cheaper and, if nothing else, provide additional energy inputs alongside coal, oil, and natural gas. When there are more ways to generate power, and they are getting cheaper, that seems pretty deflationary to me as energy is an input cost in so many industries. I would also argue that a world economy more focused on sustainability will put a higher emphasis on more efficient use of other resources, either via recycling, efficiency gains, or alternatives. As an example, consider lithium. There is a lot of talk that with the rise of EVs and battery storage of energy, lithium prices are going to explode and stay high. The price of lithium has certainly increased over the last few years (tradingeconomics.com/...), but as the price has increased, it has made lithium recycling more viable, battery makers have a strong incentive to keep improving their technology to either use less lithium or get more output from their existing use, and some companies/institutions are investing heavily in research to find a cheaper type of battery (using iron instead of lithium, as an example: www.bloomberg.com/... It is a cliche to say "high prices are the cure to high prices," especially in commodities, but I think there is truth to it.

I don't mean to wave around a magic "innovation will fix everything" argument, but if sustainability is going to focus on and require technology improvements, I think that will be more deflationary than it is inflationary, even in the short to medium term (say the next 5 to 20 years).
@No Called Strikes Investing I think you got the whole energy thesis wrong man
No Called Strikes Investing profile picture
@Stratocaster17 I'm open to another point of view on this one. What are your thoughts?
No Called Strikes Investing profile picture
This article is more about long-term inflation, and there are some recent signs that suggest long-term inflation expectations are heading lower:

A little more short-term focused, but lumber prices are in reverse (seekingalpha.com/...)

The ten-year breakeven inflation rate (the spread between 10-yr treasuries and the 10-yr inflation-indexed equivalents) is heading back down: (fred.stlouisfed.org/...)

The NASDAQ is getting close to all time highs again, and the P/S ratio of the index as a whole remains high (www.macrotrends.net/...)

All of these could turn around quickly; maybe the market is misjudging things. But the market is signaling it is less concerned about the spectre of sustained high inflation.
Hi Carleton,
I completely agree with your thoughts. I always wondered why no one is speaking about such a far-reaching subject. Tech deflation is profoundly affecting our economy, and with it our lives. I've been thinking about it for a while, you can have a glimpse at unorthodox-economics.com/...
I'd be glad to exchange views!
Envoy Global Research profile picture
Interesting take. But from my limited experience in my small business, my non-tech vendors have raised prices 10% in the last 6 months (in other industries prices have gone up 20%+). And though, these price raises for me are non-technology related, they greatly effect my business, even if I'm in the technology business basically. There are incidentally few "pure" technology businesses, and the vast majority of the economy is exposed to physical goods inflation. My general feeling is that there is massive underlying inflation in the economy that is brewing and this is a big risk going forward. The Fed is either willfully ignorant or clueless about what is going on.

Also, it 's important to realize that technology requires people, i.e. programmers, engineers etc. Salaries for good people continue to shoot higher, as there is a sort of high-skilled labor shortage. So, though technology overall is deflationary, in an environment of rising physical costs, and tight labor, the overall effect of technology deflation will be muted.
No Called Strikes Investing profile picture
@Envoy Global Research Thanks for checking out the article. You make good points, and I'm willing to admit there can still be some short-term bumps and pops in inflation and that some industries will feel it more than others. I hadn't put as much thought into very small businesses and the impacts they will feel, though in the abstract I still would expect to see them benefit in a significant way due to technological improvements. I haven't run a small business myself so I don't have direct experience, but I would imagine that while some things are getting more expensive, some things are also getting cheaper over a longer time frame. Building and maintaining a website, using various software packages to manage inventory and finances, faster computers, etc. are some examples that come to mind. I assume it is faster/easier (and by extension cheaper) to have a web presence today than it was 5 or 10 years ago, for example. Or if I were a small tech start up, my server and digital storage costs would be a lot lower by using something like AWS as opposed to having to rent space in a physical data center, buy my own hardware, and pay a server engineer to keep it running. I can see how some costs can increase, but I can also picture those cost increases being offset elsewhere by cost decreases. Over a longer time frame (say the next 5-10 years), I would expect more cost inputs for small businesses to be cheaper rather than more expensive, in aggregate. That doesn't mean things couldn't jump here in 2021 though.

The programmer salaries is an interesting situation. I get the sense that this is starting to turn around a bit, with recent moves by larger tech companies to let employees work remotely from anywhere in the country but pay them less if they move to a lower cost of living area. I would also suggest that improvements in the tools used by software engineers allows them to complete work more efficiently than in the past, meaning that the average company will need fewer engineers in the future, even if they have to pay more per engineer. As mentioned above, AWS and Azure mean most small tech businesses no longer need to hire as many (if any) server engineers. Developer frameworks, compiling tools, and code deployment technologies are all improving and cut out a lot of coding busywork that existed 5, 10, or 15 years ago. Companies like Shopify will handle any of your e-commerce coding needs; if you want to be an online retailer you need far fewer engineers today than you would have in the past. Sure, Amazon, Shopify, Zoom, and the other companies that provide these services will still need to continue to hire engineers, but these engineers will continue to be able to be more and more productive, and it is simply more efficient to outsource tasks like these to other companies.

All that to say I am willing to accept that we might still some pockets of higher inflation in the years ahead, if we look out 10, 20, or 30 years I would rather bet on deflation than inflation, at least when it comes to consumer prices. I expect the deflationary effects of innovation to continue to snowball.
Envoy Global Research profile picture
@Carleton Hanson " I assume it is faster/easier (and by extension cheaper) to have a web presence today than it was 5 or 10 years ago, for example." I've been in the web business, e-commerce, for 15 years, so I'll comment on this. The answer is that yes it's easier than ever to get started with a presence nowadays, but that doesn't make it any cheaper to run a web business. In fact, it's become much more expensive in the last few years, for a wide variety of reasons. Any small business needs to constantly deal with shifting Google algorithms, fake CPC clicks, the threat of Amazon, software upgrades, FB disintermediation etc. All of this takes an enormous amount of time and $. It's easy to get in, but extremely difficult to make $. I should also add that if it's easy to get started in anything, that implies that there is no moat anymore, which means profits are driven to 0 over time (except of course for the gatekeepers, like Google/Amazon). As for software, the reality is that it is probably about 10X more expensive now to run a web business than it was 5 years ago. That's because the entire tech industry has moved to software as a service (a good thing with bad consequences), so you find yourself having to purchase 20 different SAAS subscriptions to keep your business running, with each one locking you into their platform. This is mind-boggling confusing and very expensive. Yeah, it's cheap to start with something like Shopify, but if you actually have a business, before you know it your costs will skyrocket b/c for every tiny thing you need accomplished you'll be locked into another $50/Month subscription. It all adds up. This is a just a short summary. Don't get me started :0)
Envoy Global Research profile picture
@Envoy Global Research I would say in retrospect, if I had to do it again, I would have taken all the $ I invested in my small business, & put in Amazon stock. Would have been much, much better off. Which is the irony, in that, if everyone did this, we would have no businesses, and Amazon itself would fail. This is the inherent contradiction in the modern economy. There is more $ to be made investing than producing, while investment requires production to justify itself.
Thanks for the article. I agree about tech being deflationary force, but would argue it is not the only force. Just look at the number of technological inventions in the Weimar Germany era.
No Called Strikes Investing profile picture
@Stratocaster17 There have certainly been technological improvements in the past that helped production scale, but what is exciting/different about our current area is that we are crossing the inflection point in more areas, such that the entirety of demand can be met. Factory improvements, farming improvements, etc. in the Weimar era increased production capacity relative to earlier decades and the 1800s, but they still didn't yet allow enough production to meet all of the demand for the goods; goods were still scarce enough that people had to pay more for them. Any technological improvement will be deflationary, but I agree with your statement that just relative improvements alone aren't enough. What matters is crossing the inflection point such that the ability to produce goods doesn't just get 'better', it gets good enough to meet all of the market's demand.

In our current era, we at the point in some industries where both present and any future demand can be met without scarcity occurring. It might not be the majority of industries yet, but it is going to happen in more and more places. I would point to again to Zoom, cheese, and (almost) energy as examples. Zoom can't meet literally infinite demand, but it can meet 100% of the market's need (with perhaps some minimal additional investment), even if all office workers were on Zoom 24/7. Milk production is now so efficient that we have the ability to scale that industry such that 100% of cheese demand can be met with lots of slack to spare, such that the government is having to stockpile billions of pounds to keep dairy farmers afloat (fee.org/...). The main thing keeping oil prices from staying in the toilet has been agreement among producer nations to artificially limit supply (and the occasional cargo vessel getting stuck in a canal...). It was temporary and Covid-related, but heck we saw negative oil prices last year.

All that to say my hypothesis isn't just 'innovation will make things cheaper'; it is that we are crossing key inflection points that are essentially putting industries into a post-scarcity situation, which is going to act as a huge headwind against inflation.
Commodities will not be replaced by technology and are in short supply.
No Called Strikes Investing profile picture
@tlapp I agree that they won't be replaced, but they can be mined/harvested more and more efficiently and then turned into goods more and more efficiently. Oil and natural gas are the most common example. Fracking technology opened up entire new reserves of oil and gas, creating supply of both. Mining technology has also seen improvements, and farm innovation means more food can be produced at less cost. I agree that software isn't going to power our vehicles, but it is already lowering the cost to produce many commodity goods and materials.
More like inflation is eating technology: people should be paying much lower prices and working much less due to technological efficiency, but the Fed prints money to keep prices and hours worked rising, transferring the entire gain of technological progress to the 1%, and actually lowering the standard of living for the masses in those aspects that aren't being advanced by technology
No Called Strikes Investing profile picture
@Gunnlin I agree that policy hasn't kept pace with the new employment landscape created by technological innovation. Innovation reduces the demand and price of labor, generally, so there is definitely the risk that more people will be competing for fewer jobs that pay less. I think this risk is increasing rather than decreasing, and I agree that without policy change it is going to continue to put a lot of people in a tough spot.
Inflation has a lot of fathers .. trades , oil price , creative destruction , import inflation , negative rates ...,,!
No Called Strikes Investing profile picture
@heung Very true, and handicapping how important each factor is and how important it will be in the future is difficult. From a probability point of view, however, I think technological innovation is being underweighted by the market and is already having outsized impacts in keeping consumer price inflation low. It is an immense headwind to rising consumer prices. And, once innovation allows more and more industries to pass the supply/demand inflection point, the ability to produce enough goods to satisfy entire market demand outweighs all of the demand pressures. There are many examples, but I think the Zoom example from the article is the best example of crossing that inflection point.
An interesting article, but some areas of the economy do not appear to have been flat or deflated; housing costs have sky-rocketed over the last 12 years, for example. Education cost increases have not stopped either.

I agree that tech is, overall, deflationary, but I think the broader argument is that innovation is deflationary, and tech is the sector that best (or most often) taps into that attribute. The energy sector, for example, was transformed recently when it mastered fracking and "created" oil and natural gas reserves where there weren't any before. Overall, it caused energy prices to fall dramatically.
No Called Strikes Investing profile picture
@A different Felix Exactly; I don't just mean technology as in SaaS companies and such; innovation is the more accurate word. Exactly to your point, when fracking opens up new supplies of oil and natural gas, it pushes the price down.

Housing and Education are definitely a tougher area to scale, along with some parts of healthcare, childcare, etc. Even in those spaces there is innovation on the way, but I agree that they are likely to see sustained inflation for some time yet. It is tough to know exactly what innovation's impact will be; will improvements in work from home technology allow more people to live outside of cities, decreasing demand for urban real estate, for example? Do online classes mean universities can accept more students without adding professors? I'm realizing as a reply that some innovations need to come with cultural change as well, which I find even harder to predict.
@Carleton Hanson Thank you for the reply and solid answer. I didn't mean to sounds as if I was contradicting you; I see things similar to the way you described them in your article. I guess I just wanted to add my $.02 :)
No Called Strikes Investing profile picture
@A different Felix Oh yeah, for sure. It is a really good point to highlight innovation vs technology; I think it makes things clearer.
424270 profile picture
Technology is not enough when inflation is the goal
No Called Strikes Investing profile picture
@424270 Interesting interview, and I agree that monetary policy will of course have an impact, especially for areas of the economy where supply doesn't yet scale efficiently. I think in the long term, however, in industries where supply can scale to meet any and all consumer demand, I don't know that even the Fed will be able to ensure inflation. As a small thought experiment, let's say the Fed's mandate became to increase the price of remote meetings (silly I know, but it helps me make a point). They could print trillions of dollars and give them all directly to office workers, and the price of Zoom isn't going to rise, because Zoom's platform allows them to scale up very efficiently to meet 100% of the need for market meetings, even if every US office worker was on a Zoom call 24/7. Money printing won't lead to increases in teleconferencing pricing, is my hypothesis, and as more areas of the economy can begin to scale to meet all of consumer demand, the less power money printing will have to raise prices.

I will say this brings up an issue I didn't address in the article, and that is what happens if/when we get monopolies. If Zoom was the only online meeting company in existence, they could raise prices for other reasons, but it still wouldn't be due to an increase in the money supply.
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