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Too much of our market system revolves around the short term. This is certainly true of the inflation debate. Last week’s data showed U.S. prices were rising at the fastest pace in 13 years. This has led to everyone the best investors to restaurant and hotel owners, who now find that they may have to do so pay more for previously low-service personnel, to worry about an overheating economy.
But hand effort is premature. These early signs of rising prices reflect more than a predictable trend, following the closure of animal spirits, than any long-term trend. Supply chain bottlenecks will soon be reduced, as they did in 2020 with, for example, personal protective equipment. Car and vacation purchases will decline as post-pandemic spending spends. And waiters who receive high salaries today can be replaced by automated systems tomorrow – just look at how many summer travelers already take advantage of their cocktail orders before the flight on an iPad.
What we are not talking about enough, and what will surely be much more significant and difficult to predict, is how technology, demographic change and its combined effect on real estate, will affect secular trends in inflation. This is what really matters to workers, companies and asset prices.
Think first about changing how and where Americans want to live and work. Some of the cheapest parts of the southern and western U.S. have seen one influx of people who lived in expensive coastal cities but are no longer connected to their offices. But that remains an incipient change. Most people who leave expensive apartments in New York or the Bay Area move to slightly cheaper adjacent subway areas or to nearby rural and suburban areas. not inside the US.
Any assumes that these changes will last. If bankrupt cities cannot fix public services or education, some urbanites, especially those with children, may leave cities for good. But others are already coming back and can go without masks to their favorite theater or restaurant.
Either way, that “migration mania”It has caused a year-on-year increase in house prices of 24%. Prior to the pandemic, housing inflation measured in rents and rent equivalents represented the much of US inflation. As Daniel Alpert of Westwood Capital points out, “While house prices could fall if inflation persists and interest rates rise, ultimately higher prices paid by homes from mid-2020 will be reflected in rents. and rent equivalents “. This, as he told me, would “stuff” any decrease in the price of other goods and services.
The Fed has told us not worrying about inflation: Things will calm down in about six months, when stimulus payments are over and the summer hike is over. But another wave may begin retired baby boomers keeping $ 35 billion in assets starts giving money to their children.
Some believe that this will have a profound inflationary effect, insofar as it is money that comes out of financial markets and is spent on spending in the real economy, whether in households, cars, health care or education. Others think this transfer of wealth will be inflation without emission: the lifespan of the longest boomers will eat up more retirement savings and most of what is left will go to the richest which can only consume so much.
What, if anything, could cushion long-term inflation? One way is if more workers produce more goods and services so that people can consume them. Without this, you have greater demand than supply, so inflation is rising. These jobs also have to pay well enough to support consumption.
This leads us to one of the most complicated long-term trends of all: the future of work. The pandemic has accelerated the digitization of everything. I think this will create a major disinflationary force in the world economy.
Corporate investment in “intangible” assets such as intellectual property and software increased sharply during the pandemic. An executive poll last year, by consulting firm McKinsey, it found that three-quarters of respondents in North America and Europe hoped to accelerate those investments over the next four years. This exceeds 55% between 2014 and 2019.
Such investments increase productivity, but at the expense of jobs, and fewer jobs translate into less demand. Combined with digitization, this could drive down the prices of goods, as well as services such as health care and education. Next to housing, these services are usually the main ones most inflation-generating categories among OECD countries, including the US.
This technology-driven productivity would therefore be deflationary. Also if there were more workers able to take advantage of these new technologies in their work. Ideally, government investment in requalification should do so. By turning low-paid care work into more skilled middle-income jobs, consumption could rise even as prices fall in sectors such as healthcare. The demand for this increases sharply as boomers age, even though the jobs currently on offer are not productive or well paid.
This investment in the “solidarity economy” is the focus of much of the stimulus proposed by the Joe Biden administration. We hope it happens. Otherwise, if nothing changes, we may see more digitalized companies employing a few well-paid people and the cost of consuming the goods and services that make up the life of the middle class will continue to rise.
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