When it comes to inflation, Federal Reserve officials remind me of the characters Estragon and Vladimir in Samuel Beckett’s existential play “Waiting for Godot.” Fed Chair Jay Powell and company seem to think higher prices will arrive soon, sticking to their 2% inflation target despite doubts over whether it will ever be reached. I have a feeling that like Beckett’s unseen protagonist, inflation’s not going to show up.
Truth be told it hasn’t been just Powell and his immediate colleagues. Fed officials have been mystified at the absence of rising prices for years, which is curious because to me the reason is blindingly obvious.
Of course it’s technology.
Technology is keeping a lid on prices
Technology — specifically the digital revolution, the internet, and mobile technology — are making the cost of almost everything we do cheaper and cheaper. It’s keeping a lid on prices, or driving them down, in energy, food, apparel, transportation — you name it. (Yes, I know energy and food are not part of core the core Consumer Price Index, but these sectors are key components of overall pricing in our economy. )
The Fed’s lack of understanding actually extends beyond just inflation, and again it’s connected to the digital revolution. What the Fed is so clearly missing, which is observable intuitively and right in front of their noses, is that we are in the midst of a massive technology-driven productivity boom. And that surge in productivity is hugely deflationary.
You don’t need a PhD in economics to understand this. In fact I would argue that being a party to the economic status quo might blind you to this new paradigm, because it weds you to traditional metrics that seem to be missing these gains.
Stanley Druckenmiller, founder of Duquesne Capital Management, speaks at the Sohn Investment Conference in New York, May 8, 2013. REUTERS/Brendan McDermid (UNITED STATES - Tags: BUSINESS)
“We have a two percent...inflation target that if we don't meet, it's Armageddon. I have trouble with the preciseness of it and the attention [paid] to it,” said prominent investor Stanley Druckenmiller on CNBC recently. “You may not agree with me but I think we're in one of the biggest productivity inflection booms since the late 1800s. I am very confident that it's not being measured in real GDP.”
I agree with you 100%, Stan.
A valuable basket of free services
Let’s consider Google’s (GOOG, GOOGL) products and services in this context.
Think of all that Google delivers to consumers for free: search, maps, email, a browser, etc. And think about how much more productive, say just maps, makes customers. This is a hugely valuable basket of services.
A recent article from MIT’s website reinforces this point: “According to the research published today in the Proceedings of the National Academy of Sciences, internet search is the most valued category of digital goods. The median user would require compensation of $17,530 to forgo search engines for a year. Users would need $8,414 to lose access to email for a year, and $3,648 to go without digital maps for that same period.”
Izmir, Turkey - March 27, 2011: Close up of Google Maps main page on the web browser. Google Maps is Google\'s very popular map solution. It uses satellite generated images and provides detailed maps all over the world. Source: Getty
The downward pressure on pricing and inflation in these digital businesses and related businesses is massive, and yet for the most part not taken into account by the Fed. (By the way, I understand we pay for these “free” services by Google collecting our data, and that it may or may not be a good trade-off.)
Next, let’s look at the oil and gas industry. Technology is essentially continuously creating new supplies of energy by virtue of the fact that innovation in this business allows us to drill for deposits that would not have been economical even a year earlier. So every new technological breakthrough in the oil and gas business creates more supply. Peak oil and sustainable higher prices? Forget about it.
What about apparel? According to a new study by CB Insights: “Today tech is transforming fashion at a faster pace than ever. From robots that sew and cut fabric, to AI algorithms that predict style trends, to VR mirrors in dressing rooms, technology is automating, personalizing, and speeding up every aspect of fashion.” Fast fashion kings H&M, Uniqlo, and Zara that have reset the business are all about turnover and lower pricing.
As for general merchandising, it’s hard to overstate the deflationary power of Amazon (AMZN) — and remember, it’s just getting started in grocery — making Walmart’s (WMT) prowess appear almost quaint.
The two major exceptions
Interestingly, the only two big sectors where prices have been rising for years are education and healthcare. In education the number of top schools is limited (supply), which with strong demand has been inflationary. Increasingly though, outside of the elite colleges and universities, there is downward pressure on pricing, thanks to demographic shifts and — you guessed it — online (read digital) classes. Healthcare is vexing because while there are huge technological advancements of course, prices continue to rise, in part because of systemic dysfunction but also perhaps because patients will forever want better outcomes (i.e., lower mortality rates and increased longevity).
CHICAGO, ILLINOIS - JUNE 04: Jerome Powell, Chair, Board of Governors of the Federal Reserve speaks to guests during a conference at the Federal Reserve Bank of Chicago on June 04, 2019 in Chicago, Illinois. The conference was held to discuss monetary policy strategy, tools and communication practices. (Photo by Scott Olson/Getty Images)
But education and healthcare are the exceptions. In most other businesses, technology is making all of us vastly more productive. Talk to anyone who works in sales, the law, media, hospitality, heck even an auto assembly plant, and ask them if technology is allowing them (or requiring them) to do huge amounts more work than 20 years ago. They would look at you like you are crazy. Of course we are all doing more! Much more!
And yet the Fed says that productivity hasn’t increased all that much. Huh? Exactly what and how is the Fed measuring? It all smacks of some sort of disconnect with the real world.
Jay Powell and the Fed Governors are way smarter than I am, of course. And I’m not one of those Fed-bashing trolls, but I really think the Fed is missing something here. Something important that has huge implications for interest rates — and even more than that, its management and understanding of the economy.
To me that’s confounding—and unsettling, too.
It all reminds of this bit of dialogue from Beckett’s Godot:
ESTRAGON:
Let's go.
VLADIMIR:
We can't.
ESTRAGON:
Why not?
VLADIMIR:
We're waiting for Godot.
ESTRAGON:
(despairingly) Ah!
Like Beckett's characters, the Fed's still waiting despairingly for higher prices that show no signs of ever arriving.
Andy Serwer is editor-in-chief at Yahoo Finance. Follow him on Twitter: @serwer
