Technology Is Eating Inflation

Summary

• 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.

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 services to scale efficiently. If the production of goods can scale efficiently enough to satisfy the market's present and future demand for goods, the price of those goods should not increase even if demand increases.

As technology improves, this inflection point will be reached in more and more industries and inflation will get weaker and weaker. We have more technology today than ever before, and the pace of technological innovation is increasing, therefore deflation is more likely than inflation. Certain industries will remain susceptible to short-term supply shocks and temporary inflation spikes, but long-term inflation across the general economy is not something I am worried about, even in face of prolonged and substantial fiscal stimulus.

Technology is Deflationary

Technology is deflationary for two primary reasons. Technology reduces the demand for labor, which puts downward pressure on wages and employment levels, which in turn reduces demand for goods and services because workers have less money to spend. Technological innovation leads to automation, tools that make workers more efficient, and the elimination of some job roles. Robots replace humans in factories, Amazon's (AMZN) AWS service reduces the need for companies to hire data center engineers, and self-service checkout lanes lead to layoffs at grocery stores.

If the pool of labor stays relatively constant and the need for labor is reduced by continuing improvements in technology, it is logical to assume that wages will be suppressed over time and the buying power of the average consumer will be reduced. Wage growth hasn't been completely stagnant and there was a jump during the pandemic, but it has been close to the Fed's 2% inflation target for most of the last decade and is dropping off sharply as the economy reopens:(Source)

Korn Ferry's 2021 salary survey indicates that "more businesses are planning no raises for all employees." The survey notes that Covid-19 is the primary driver in the short term, but I expect technological improvements to put downward pressure on wages in the long term as well.

This demand-side deflationary aspect of technology is important, but can be counterbalanced by fiscal policy decisions (direct stimulus, Universal Basic Income, etc.). Many of the arguments I see for inflation acknowledge the deflationary aspect of technology but argue that inflation is still more likely due to the volume of cash being given directly to consumers and a rapidly increasing money supply. I think the demand-side deflationary aspects of automation are not being fully appreciated by the market, but I acknowledge that they can be overwhelmed by fiscal stimulus.

The second deflationary aspect of technological innovation affects the supply of goods and services. Technology is allowing more and more businesses and industries to cross an important inflection point; the point at which the production of goods and services can scale faster than the consumer demand for them. As technological improvements lower production costs and increase the speed at which goods and services can be produced, it becomes easier to satisfy the market's demand for particular goods. If the supply of goods can always meet demand, then there is no room for price increases, generally speaking. Said another way, innovation means there is more 'slack' in the production of goods and services than there appears to be on the surface.

The crux of my hypothesis is not that innovation can create a literally infinite supply of goods or services, but rather that innovation has allowed companies to satisfy the entirety of the market's present and future demand in an increasing number of industries.

Examples of Scaling

Let's look at some real-world examples. Software as a service (SaaS) companies are a good place to start. The market has correctly identified that SaaS companies should get high sales and earnings multiples in part because they can scale so efficiently and can add new customers virtually for free. If 100,000 people join Facebook tomorrow, Facebook's cost of revenue is going to be virtually unchanged. Zoom (ZM) was a perfect example at the start of the pandemic.

Thousands of companies around the world all moved to remote work in less than a month and, after ironing out some small glitches and capacity issues, Zoom was able to handle the increased demand for their product without needing to double or triple the price of their service. This is a great business model for Zoom and other teleconferencing companies, but it is also highly deflationary because the entirety of the market's sudden demand for remote conferencing tools was met nearly overnight without the need for price increases.

Similar effects can be seen in some commodity industries. The commodity industry is well known for boom and bust cycles, where the market swings from undersupply of a resource to oversupply. In times of undersupply there are sharp price spikes, followed by price collapses as the supply imbalance is corrected. If oil prices get high enough, oil producers ramp up production to meet the demand and prices come down.

If a drought in the US Midwest lowers corn production and corn prices increase, you can bet that next year there are going to be a lot more farmers planting corn to take advantage of higher prices. Technological innovations in the commodity space are making it easier for producers to close supply gaps quickly and efficiently. Fracking technology, more sophisticated methods of detecting new oil reserves, and improvements in wind and solar are all combining to lower the overall cost of energy.

Farmers are achieving record yields in crops like corn (source) and dairy farmers have moved from milking cows by hand to building robotic milking parlors that can milk dozens of cows simultaneously (source). I anticipate there will still be short-term supply and demand shocks, but I would expect them to be rarer, last for shorter periods of time, and be less severe.

As a final example, consider the entertainment industry. Streaming services have dramatically reduced the cost of media consumption and allowed new market participants to scale and compete more efficiently. With a Netflix (NFLX) account, I can watch a nearly unlimited number of movies and shows for the price of one movie theatre ticket. New music artists can produce studio-quality albums from their basements (via improved recording technology) and make their content accessible to millions of potential new fans overnight (via services like YouTube). The quality of content can vary across different platforms, but by putting the content online its consumption can scale quickly and efficiently.

There are many other examples of technology helping the supply of goods and services scale more efficiently. Things start to get really interesting when the scaling gets efficient enough that it can accommodate the entirety of consumer demand. Let's look at cheese as an example.

As mentioned above, technological improvements in the dairy industry mean that more cheese can be produced more cheaply than ever before and it is relatively easy to add additional capacity. At the same time, there is a clear upper bound to how much cheese a person can eat in a given day or year.

There are still limits to cheese production; even with robotic milking we will never be able to produce enough cheese to allow the average person to eat a million pounds of cheese a year, but the demand for cheese is never going to be that high; there is a physical limitation (not to mention a preference limitation) to how much cheese can be consumed in a given year.

The same goes for some SaaS companies and entertainment; there are only 24 in a day to consume media or participate in a Zoom call, so while production of these goods and services isn't truly infinite, demand cannot be infinite either and there are now more limitations on the demand side for these goods than on the supply side. It is hard to see a way for there to be meaningful inflation in sectors like these, as supply will always be able to meet or exceed demand, even if demand were to increase due to short-term factors or fiscal stimulus.

Short-Term Inflation Spikes and Exceptions that Prove the Rule

The more efficiently the production of a good or service can scale, the less likely it is to see meaningful price inflation. The opposite is also true. The recent pandemic provides some examples. Early on in the pandemic, especially as lockdowns were beginning, goods like Clorox (CLX) wipes, toilet paper, hand sanitizer, and masks quickly became unavailable. Most retailers chose to remain out of stock rather than charge a high enough price to keep the items on shelves (for both legal and PR reasons), but this was still clearly an example of an inflationary spike.

If you really wanted hand sanitizer you could get it, but you would have to pay 400-600% more and purchase it from resellers on Amazon (source). In practice, inflation for these types of goods spiked; the supply of the goods couldn't scale fast enough to meet the huge demand spike. That being said, less than a year after lockdowns began all of these goods are once again available to consumers at prices comparable to pre-pandemic levels (albeit thanks in part to limits on how much can be bought per customer per day).

Companies were able to ramp up production eventually; Clorox will soon be able to produce over 2 million canisters a day of disinfectant wipes, as an example (source). Was there a short-term jump in inflation? Absolutely. Will prices revert to pre-pandemic levels once production ramps up? I hypothesize yes, because companies will be able to cost-effectively meet the increased demand.

I don't mean to downplay the real and tangible pain inflicted by short-term inflation spikes. If you really needed toilet paper in April of 2020, it was difficult to find. Food prices rose for many staple items, and some items were unavailable all together. Natural disasters, terrorism, canal blockages, and other one-time events are likely to cause short-term jumps in energy prices.

Zoom (NASDAQ:ZM), Facebook (NASDAQ:FB), and Microsoft (NASDAQ:MSFT) can all handle overnight demand shocks and the nature of SaaS businesses mean supply shocks are virtually non-existent, but obviously not all industries are at that point yet and the production and delivery of physical goods might remain at risk for many more years. That being said, it took Clorox (NYSE:CLX) about 12-14 months to ramp up enough production to meet increased demand and get their disinfectant wipes back on the shelf; I am confident that it would have taken them longer to get to 2 million canisters per day in, say, the 1970s. Technology is allowing companies to ramp up faster and shortening the duration of inflationary spikes.

Other areas of the economy are experiencing prolonged periods of high inflation. The usual examples cited are housing, education, healthcare, and childcare. These sectors have high inflation because demand for these services is relatively inelastic and it is not easy to scale production of those services. Zoom can add thousands of users overnight, but building homes takes time, is labor intensive, and is constrained by physical space limitations.

Colleges and universities only have so many dorm rooms available and professors can only grade so many papers and exams. There are a relatively fixed number of doctors and physicians and a single doctor isn't yet able to care for hundreds of patients a day the way a single dairy farmer can now milk hundreds of cows a day thanks to robotic milking. Childcare is particularly difficult, because any one child is going to need a good deal of direct supervision and parents expect childcare workers to provide at least a basic level of intellectual and social stimulation.

Even in sectors where scaling is difficult today, there are technological innovations that are working to break the cycle of inflation. Finding space to build a home in a desirable location will remain a limiting factor, but advances in 3D printing technologies are dramatically reducing the cost to build homes (source). Surgical robots, automations in lab work, and improvements in Artificial Intelligence are helping doctors perform operations and diagnose conditions more quickly and accurately.

A move to online lectures and automated tools for grading exams is allowing professors to teach more students per semester. Childcare is still a tough nut to crack, but maybe giving every kid a tablet with enough engaging content on it will allow daycare facilities to accept more children in the future. Some of this is pure speculation, but as a general rule I would expect to see increasing deflationary pressure anywhere that technology is improving efficiency. It is difficult to find an industry that is immune to innovation.

Investment Implications

I will preface this section by saying that I am not a macro-style investor, so you can take my thoughts with a grain of salt. That being said, I think there are some high level concepts that follow from a deflationary hypothesis. First and foremost, I am very comfortable holding equities and am not afraid of a dramatic rise in interest rates. Pricing power, brands, and competitive moat are going to become even more valuable.

Technological improvements might make it easy to scale the production of ketchup, but if customers are used to buying Heinz ketchup it is conceivable that Heinz will still be able to raise prices despite a general increase in the supply of ketchup. In a similar fashion, I expect companies that sell luxury goods and services to do well; most luxury brands already artificially limit the supply of their goods and have built business models around selling fewer goods for much higher prices. Finally, I am considering allocating a small portion of my portfolio to the iShares 20+ Year Treasury Bond ETF (TLT). I think the market is overly concerned about inflation and has pushed up Treasury yields as a result.

I would be looking for price appreciation on my investment when inflation fails to materialize; I'm not excited about earning just a 1.6% yield on my investment. There is the risk of short-term supply and demand shocks that might send rates higher and the ETF lower in the short term, but if one accepts the thesis that technology is going to play a disproportionate role in lowering inflation in the future then it makes sense to bet against long-term inflation.

As a final note, I find the current investment climate interesting because on the one hand the market seems to understand the transformative power of technological innovation and is applying high multiples to technology companies, while at the same time sounding the alarm about runaway inflation. More and more companies are starting to buy back their own stock (prior to the pandemic anyway), presumably because they don't have profitable reinvestment opportunities. This would seem to indicate that these companies are already able to scale efficiently enough to meet the demand for their products without needing to invest additional capital; this would be a sign that deflation is on the horizon, not inflation.

Conclusion

My hypothesis is that technology is deflationary. 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. I would invite readers who either agree or disagree to leave a comment below.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This article is not financial advice, it is only an expression of my own opinions as an individual investor.

Comments

[Sidd_modi]

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.

[erebos]

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]

@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).

[Stratocaster17]

@No Called Strikes Investing I think you got the whole energy thesis wrong man

[No Called Strikes Investing]

@Stratocaster17 I'm open to another point of view on this one. What are your thoughts?

[No Called Strikes Investing]

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.

[Fernando Fominaya]

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]

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]

@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]

@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]

@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.

[Stratocaster17]

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]

@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.

[tlapp]

Commodities will not be replaced by technology and are in short supply.

[No Called Strikes Investing]

@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.

[Gunnlin]

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]

@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.

[heung]

Inflation has a lot of fathers .. trades , oil price , creative destruction , import inflation , negative rates ...,,!

[No Called Strikes Investing]

@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.

[A different Felix]

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]

@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.

[A different Felix]

@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]

@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]

Technology is not enough when inflation is the goal
themarket.ch/...

[No Called Strikes Investing]

@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.