Too much in our market system revolves around the short term. That certainly holds true for the debate about inflation. Last week’s data showed US prices rising at their fastest pace in 13 years. That has led everyone from top investors to restaurant and hotel owners, who are now finding that they may have to pay more for previously low wage service staff, to fret about an overheating economy.
But the hand-wringing is premature. These early signs of rising prices are more reflective of a predictable, post-lockdown surge in animal spirits than any longer term trend. Supply chain bottlenecks will soon ease, as they did in 2020 with, say, personal protective equipment. Purchases of cars and vacations will subside as the post-pandemic spending splurge passes. And waiters commanding high salaries today may be replaced by automated systems tomorrow: just notice how many summer travellers already tap their pre-flight cocktail orders into an iPad.
What we aren’t talking enough about — and what will surely prove far more significant and harder to predict — is how technology, changing demographics, and their combined effect on real estate, will affect secular trends in inflation. This is what really matters for workers, companies and asset prices.
Consider first the change in how and where Americans want to live and work. Some of the cheaper parts of the southern and western US have seen an influx of people who used to live in expensive coastal cities but are no longer tethered to their offices. But this is still a nascent shift. Most of the people leaving pricey New York or Bay Area apartments are relocating to slightly cheaper adjacent metro areas, or nearby suburban and rural areas — not to the US interior.
It’s anyone’s guess how long these shifts will last. If bankrupt cities can’t fix public services or education, some urbanites — especially those with children — may leave cities permanently. But others are already moving back now they can go maskless to the theatre or a favourite restaurant.
Either way, this “migration mania” has led to a 24 per cent year-on-year rise in home prices. Before the pandemic, housing inflation as measured in rents and rent-equivalents accounted for the lion share of US inflation. As Daniel Alpert of Westwood Capital notes: “While home prices could fall if inflation persists and interest rates rise, eventually the higher prices paid for homes from mid-2020 on will be reflected in rents and rent equivalents.” This, as he told me, would “backfill” any decline in the price of other goods and services.
The Fed has told us not to worry about inflation: things will calm down in six months or so, when stimulus payments are tapped out and the summer surge is over. But another surge may be beginning, as retiring baby boomers holding $35tn in assets start giving money to their children.
Some believe this will have a profoundly inflationary effect, to the extent that it’s money coming out of financial markets and into real economy spending — be that on homes, cars, healthcare or education. Others think this wealth transfer will be an inflation non-issue: longer boomer lifespans will eat up more retirement savings, and most of what’s left will go to the wealthiest who can only consume so much.
What, if anything, could dampen inflation over the longer term? One way is if more workers produce more goods and services for people to consume. Without that, you have greater demand than supply, so inflation rises. Those jobs must also pay sufficiently well to support consumption.
This leads us to one of the trickiest long-term trends of all: the future of work. The pandemic has sped up the digitalisation of everything. I think that’s going to create a major disinflationary force in the global economy.
Corporate investment in “intangible” goods such as intellectual property and software rose sharply during the pandemic. An executive survey last year by McKinsey, the consultancy, found that three quarters of respondents in North America and Europe expected to accelerate such investments over the next four years. That is up from 55 per cent between 2014 and 2019.
These kinds of investments increase productivity but at the cost of jobs, and fewer jobs translates into less demand. Combined with digitisation, this could drive down the prices of goods, plus services such as healthcare and education. Alongside housing, these services are generally the most inflation-generating categories among OECD countries, including the US.
Such technology-driven productivity would therefore be deflationary. So too if there were more workers able to leverage these new technologies in their work. Ideally, government investment in reskilling will do just that. By converting low paid care work into higher skilled middle income jobs, consumption could rise even as prices might fall in sectors such as healthcare. Demand for that is rising sharply as boomers age, yet the jobs currently on offer are neither productive nor well paid.
Such investment in the “caring economy” is the focus of much of Joe Biden’s administration’s proposed stimulus. Let’s hope it gets through. Otherwise, if nothing changes, we may see more digitalised businesses employing only a few highly paid people — and the cost of consuming the goods and services that constitute middle class living will continue to rise.
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