HAS THE LONG-TERM INFLATION ENVIRONMENT CHANGED?

In the aftermath of the pandemic many companies are reconsidering the global nature of their supply chains. With globalisation seemingly under threat will this trigger a change in the inflation environment?

The last thirty years has seen the global inflation rate trend down from approximately 9% to around 2% today. Two powerful forces explain this impressive disinflation. Globalisation in the 90’s and early 2000’s, when over 2 billion people (in the form of China, India and Eastern Europe) were integrated into the global trading system, triggered an over supply of less skilled labour. This saw many factories relocate to these regions and drove down the cost of manufactured goods. Technology also played a very important role as advances in digital technology saw a string of industries disrupted (travel agencies, book sellers, the music industry and retail distribution). This resulted in margins being crushed and falling prices.

However, some are beginning to wonder whether globalisation and low inflation may go into reverse. Certainly, in the aftermath of the pandemic many companies seem to have decided that regional supply chains are more robust than global supply chains. Furthermore, the excess of less skilled labour that was a powerful factor in reducing the price of manufactured goods, may have finally been absorbed. Indeed, some commentators have argued that a rapidly ageing global population, where the elderly consume rather than produce and the demand for goods and services rises relative to supply, will be sufficient to generate meaningful wage inflation.

Whilst the argument is a good one it seems to underestimate the continued digitisation of the global economy. The next stage of the digital revolution is the integration of artificial intelligence into computer systems and the internet. These innovations hold out the prospect of autonomous driving, computer generated reports and newspaper articles, call centres staffed by AI assistants and the use of robots to perform all manner of basic tasks. Needless to say, these developments will have a profound effect on wages and employment.

So, whilst an ageing population and a stalling in the trend of globalisation will put some upward pressure on wages, this is likely to be offset by an acceleration of the digitisation of the economy.  All-in-all we see the trend of global disinflation as having run its course. However, inflation is expected to remain at low levels rather than re-accelerating.

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This post was written by Robin