Dec 15, 2021 - Economy & Business

The "powerful forces" that will help lower long-term inflation

Gif of a $100 bill looking around.

Illustration: Annelise Capossela/Axios

Right now, we’re in the thick of it. Inflation is coming in hot, and it’s all around us.

The big picture: Much of the current debate centers around when the current bout of inflation will peak and how long it will last.

  • But it's also worth looking farther out into the future. After supply chain snarls begin to ease and monetary policy starts tightening, the long-standing economic trends that underpinned the last two decades of low inflation will still be around.

Why it matters: Those trends, like the rapid pace of technological innovation and globalization, have helped keep a lid on price growth since the 1990s. And those dynamics aren't going anywhere.

  • “There are some very powerful forces at work over the longer run that will put downward pressure on prices,” Kristina Hooper, chief global market strategist at Invesco, tells Axios.
  • The market's view, via 5- and 10-year breakevens, is that inflation will moderate over the long haul.

State of play: Technological advances are a big factor — for example, the cost of flat-screen TVs 10 years ago, compared to now.

  • "We see technology not only improving the product but taking down the price of the product. That tends to be a deflationary force," Hooper notes.
  • Meanwhile, the new remote work environment has turbo-charged the efforts of companies across all sectors to digitize and automate — moves that usually lead to cost reductions.

And globalization — the ultimate deflationary force — is not going away, as economist Megan Greene outlines in this FT column.

  • Still, over the next 20 years, globalization may look very different from the past two decades. And those differences will determine the extent of its deflationary impact, says Liz Ann Sonders, chief investment strategist at Charles Schwab.

What's happening now with supply chain resiliency is more along the lines of "diversification, as opposed to de-globalization," Sonders says.

  • Manufacturers and retailers are looking for ways to diversify supply chains and move away from "just in time" inventory strategies that leave little wiggle room for supply shocks. We may see more manufacturing migrate out of China to other parts of Asia, or closer to home in Latin America.

Meanwhile: Worker power, which produces higher wages, has been on the decline for several decades (higher wages can translate to higher prices).

  • Union members' share of the workforce in 2020 was half of what it was back in 1983. And the total number of strikes in recent years pales compared to the norms across the 1950s to the 1980s.
  • Wage gains this year have not kept up with inflation.

The bottom line: No one knows for sure when the current period of inflation will peak. But when it does, these long-term forces will still be at play.

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