Inflation in the Twenty-First Century: Unintended Consequences

Thank you Kevin.
The most concise and clearly written explaination of the current problem facing central banks and investors I have read to date.
Looking forward to your follow up.

I really like the note, like others have said it is clear and concise about a topic that lends itself to completely different adjectives. Which is always great.

But, (and given the credentials of the man writing this and , really, everyone here on this forum…I am starting to doubt myself a little), how can there be a 21st century diagram of the opposing inflationary/deflationary forces on either end of the “unstable equilibrium”, that does not list “technology/innovation” as a source of deflation? Does this not firmly belong alongside globalisation and demographics?

And if not, is the argument being made that technological innovation at this point in history has no (!) impact on inflation or simply that the inherent difficulties in measuring the direct impact of this disqualifies it from the diagram?

I understand that it complicates the picture that technology does not advance on a linear scale, that progress tends to happen in a step-change manner which means that there will be periods in time where there is very little impact on inflation one way or another - but this diagram is supposed to reflect 1980 to 2021! Are we saying that technological innovation during this period has had no bearing on inflation?!

The Federal Reserves itself, which perhaps for obvious reasons, has not paid too much attention to the disrupting tendencies of technological innovation started to organise a conference series in 2019 and even the description of the conference succinctly summaries the disinflationary impact of technology:

Technology-enabled disruption means that workers are increasingly being replaced by technology. It also means that existing business models are being supplanted by new models, often
technology-enabled, that bring more efficiency to the sale or distribution of goods and
services. As part of this phenomenon, consumers are increasingly able to use technology
to shop for goods and services at lower prices with greater convenience—which has the
impact of reducing the pricing power of businesses. This reduced pricing power, in turn,
causes businesses to further intensify their focus on creating greater operational
efficiencies. These trends appear to be accelerating.

I am genuinely puzzled by this. It feels like anyone would need a solid reason to completely leave it out of a diagram attempting to portray the opposing forces at play and measurement bias is in my opinion that reason enough.

What I am missing?

Yes, I am aware of Friedman’s quote. And of course, as a monetary economist he would prefer to define inflation as a purely monetary phenomenon. In the strictest sense, I will even agree that in the sense that inflation is defined as prices going up - then yes it is a monetary phenomenon.

But in the diagram in the article we are talking about, other distinctly non-monetary phenomenons are referenced, under the heading of “Structural”. “Demographics” is not a monetary phenomenon after all., so technological innovation would in my opinion belong under this heading in order to accurately reflect the pull and push between monetary and structural forces.

The equilibrium may well be an administrative choice, to me the interesting question is whether the administration process is accurately taking into consideration all relevant structural forces, if technological innovation is not considered.

There is absolutely no doubt about that being true. Harvesting technology is only one of so many examples - crop biotechnology, pesticide/herbicide development, advances in processing/freezing/preserving/packing technologies, cold chain infrastructure that reduces spoilage and preserves food product integrity, etc,

The impact of technology on productivity, including technologies impacting the utilization of agricultural and marine resources to produce various products including food products for humans and animals, ingredients for food products, or health and beauty aid/personal care products, etc. is constant, but may be more perceptible to casual observers when it happens in bursts. But it is always present and active, i.e, there is never a time when technology/innovation isn’t contributing to productivity gains, therefore counteracting price inflation (or bearing a deflationary effect).

However, I think that including the effect of technological advancements in the discussion about price inflation would confound the issue more than elucidate. This view hinges on the belief that the most valuable technology/innovation would occur whether or not the efforts to develop it are supported by government spending, and that pure capitalist motives are sufficient to spur the financial and operational investments needed for technology to advance. It’s therefore a view that’s difficult to maintain and defend amid so much evidence that taxation policy, and fiscal/trade policy do have a considerable effect on R&D investment.

Imo, this is an inextricably complicated problem specifically because of the level of wealth and power concentration we have in the world today and the ability of that concentrated power to impact all forms of policy (fiscal, monetary, trade, taxation, you name it) makes it almost hopeless to believe that policies will focus on boosting real economic growth through productivity gains, as opposed to being guided by corruption and things that are essentially legal fraud. The worst part about this is that the poorest and most vulnerable are very often the strongest supporters of policies and systems that deprive them of opportunities and/or work against their current interests because they are naive enough to believe the stories they are told by the establishment.

All that to say: if we include technology and government spending in the discussion about causing inflation to go up or down, then we should include the reality that these are influenced by a captured set of institutions, legislative and governance frameworks. Denying the latter part would be disingenuous toward the discussion topic, imo.

Edit: I think Friedman’s position probably assumed that governments and regulators always become captured and corrupted, and I think it’s impossible realistically to deny that this has occurred in our modern society, and this should be factored into any discussion that looks for non-monetary elements affecting inflation, particularly if those are often supported by government spending.