16.11.2021

INNOVATION CAN BEAT INFLATION

Technological progress may be the most powerful disinflationary force in a changing world. It seems that almost every economic conversation these days revolves around inflation. Each question seems to lead to another. Is it transient? Will it get worse? If so, when? And for how long? Which of the many factors - including growing demand for covid, supply chain shortages, fiscal and monetary incentives, energy policy, or any changes in the way we live, work and have fun since the pandemic - should be most important, as we try to get an idea of ​​what's going on, Rana Foruhar asks in the pages of the Financial Times.

Throughout the debate, one issue receives very little discussion: the role of technology as perhaps the most important variable in what may happen to inflation over the next few years.

In every inflationary factor - labor shortages, transport bottlenecks, fuel costs or even long-term pressures such as an aging population - there is an impending technological change that could change pricing calculations in ways that are difficult to predict.

Take the transition to clean energy. Demand for electric vehicles is already raising the price of raw materials such as copper, lithium, nickel and cobalt. Green vehicles and power plants are much more metal-intensive than the technologies they replace. As more companies and countries move to a carbon tax and seek to curb fossil fuel production, energy prices may rise further in the short term.

But the broader timeline, of course, is what matters. While the rapid transition to a cleaner world will create some inflationary pressures, it will drastically reduce the cost of climate disasters in the long run.

Moreover, technological innovation itself ultimately reduces costs. Morgan Stanley data show that, leaving short-term jumps aside, commodity prices have been on a downward trend for 200 years. This is because every time an energy source becomes too expensive, a new one is invented to take its place.

Maybe we are heading for a cold and expensive winter. But given the sharply declining costs of renewable technologies such as solar panels and wind farms (and the increase in public and private investment in them), there is good reason to hope that over time the final destination can be a much better and a cheaper world - one that will eliminate the analogies with stagflation from the 1970s.

What about the inflationary aspects of the supply chain delay? Some logistics experts believe that the problems in the ports will continue for years. But we are already seeing the biggest and richest companies (Amazon, Walmart and Costco, for example) adapt to this through their own innovations.

These innovations will include more vertical integration (eg owning rather than renting some of their delivery containers to have more control), but also the use of artificial intelligence systems to better track deliveries. Autonomous vehicles, both trucks and ships, are enjoying renewed interest. The first autonomous container ship will be tested in Norway by the end of the year. If such systems slow traffic, some supply chain delays and price pressures will begin to fade.

As the Internet of Things becomes ubiquitous, more and more companies will use new technologies to improve efficiency. As Cathy Wood, CEO of Ark Investment Management, noted in a recent interview, such innovations, which include autonomous mobility, blockchain, gene modification, adaptive robots and neural networks, are more likely to herald a period of long-term deflation rather than inflation, given the depth and breadth of their impact in all areas of business.

Of course, this will change the labor market in a way we still cannot imagine. Technology, for example, could play an important role in easing inflationary pressures from aging baby boomers, which will require more care just as the workforce shrinks, by increasing the productivity of existing health workers and the system.

China, which has poured $ 1.5 billion into the use of large amounts of data in healthcare over the past decade (and many more billions in artificial intelligence), is likely to be the epicenter of diagnostics and healthcare innovation driven by artificial intelligence.

Policies to use voluminous data in sensitive areas such as health and finance will, of course, vary from country to country, as regulators struggle with the social consequences of such cutting-edge technologies. These differences in national policies could in themselves be inflationary if they contribute to cross-border frictions in global business and when it comes to the movement of people, goods and capital.

In a multipolar world, there will inevitably be more delays, shortages and inconsistencies between supply and demand in the short term.

Yet the fact that the global economy has become a bit more fragmented in the last few years is also an opportunity for technology-driven innovation that could eventually bring prices down. Think of vertical farms that grow produce minutes from where people consume it, telehealth platforms and virtual education that eliminate travel costs, and 3D production that addresses complex and remote supply chains.

These are just a handful of the many new technologies that are currently thriving. The change that such an innovation can bring is perhaps the only major disinflationary trend at the moment. But it may be the most powerful.