Opinion: Inflation is not what it used to be

Investable themes: Technology, healthcare technology, education technology, leisure

The structural headwinds against inflation are strong. The world economy will have to adjust to a new normal of low and negative inflation, rather than fighting against nature.

Globalisation, demographics, and an excess of savings over investment have caused the ‘natural’ rate of interest – the rate at which, after inflation has been taken into account, the economy is at full capacity – to fall structurally. While the demographic effect may be overstated from a global perspective, so are predictions of de-globalisation. The natural rate of interest is not set to rise any time soon.

Keynesian economics calls for global secular stagnation in this scenario, but low inflation does not mean low growth. The Phillips curve – which predicts a positive relationship between growth and inflation – has been compromised by huge increases in productivity driven by the technological revolution.

Crucially, inflation is not evenly distributed amongst sectors, with labour-intensive sectors experiencing higher inflation due to the ‘cost disease’ phenomenon. As technology abates the cost disease, overall inflation falls but standards of living rise – that’s not what economics typically predicts.

Sectors of note are healthcare and education, where the intersection between technology and standards of living is most promising but most under-appreciated.

The standard-of-living gains depend on the ability of the economic infrastructure to accept and adapt to a low- or no-inflation world. Without these adjustments, secular stagnation prevails.

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