Vanguard experts discuss cheap computing power, production across the economy, and inflation.


Lara de la Iglesia: Can competition heating up in the grocery store or cellphone industries, for example, affect inflation? What does that look like?

Gemma Wright-Casparius: Yeah, so we’ve done some work on technology changes, particularly in the retail sector, and how it flows through to inflation. To the consumer basket, it’s relatively small just yet. It’s a small component. Obviously, the consumer, when they go online to shop, they feel the benefit of it, and it may actually be more significant for them than what the government is measuring. But in the final goods component, it’s relatively small. And even if we saw more technological applications in other sectors, retail consumption of clothing, food is still a relatively small percent of the overall basket. Commodity-related entities, housing is still a much bigger percentage of what we consume as individuals. So it does come through, but it’s very, very small at this juncture. But you’ve done some work that’s very interesting.

Roger Aliaga-Díaz: The work we have done is almost a complement of the other work on the competition side. But technology has also a direct effect on the cost of production across all the sectors in the country, right? So one part is—okay—like maybe the more technologically advanced gadgets are cheaper and that reduces the consumer price inflation and the effect doesn’t seem to be that big.

But as those technologies reduce the cost of production in other sectors of the economy, say in education or in health care, now we have almost a multiplier effect in which the cheaper technologies, the low-cost technologies, help to reduce the cost of other services. I mean, it’s very difficult to keep track of all those linkages throughout the economy.

Roger Aliaga-Díaz: We did some very good research in terms of whether the database that is provided by the Department of Commerce—it’s called input/output tables—where you can actually keep track of every type of input that every sector in the economy uses. So by isolating the technology input in every sector, we could do an estimate of their inflation reaction, inflation drag from technology. And we find that on average, technology has been producing a 50-basis-point drag.

Lara de la Iglesia: Fifty basis points?

Roger Aliaga-Díaz: Fifty-basis-point drag on an otherwise 2% inflation growth, so it’s a very significant drag as technology bleeds through all the sectors of the economy.

Lara de la Iglesia: Wow that’s very interesting.

Gemma Wright-Casparius: Yeah, so it doesn’t bleed through yet. Just to the consumer side, and it’s just been occurring over the last few years and so it’s been difficult to measure. So we don’t really see it. You mentioned education and other avenues where we might in the future begin to see it. I would think that policymakers are very much aware of this and are trying to get an assessment of what the structural forces will mean for future inflation.

I still get back to the central bank targets are very low compared to historical averages of inflation, and that should be a bit of an indicator that they themselves don’t expect a huge surge in inflationary pressures any time soon.

Roger Aliaga-Díaz: Right. Regardless of the cyclical forces, these technological secular forces may be an important aspect to keep in mind going forward. And I agree with you, Gemma, central banks may have to tweak the targets to account for that or to make room for the type of downward pressure on technology.

Lara de la Iglesia: Well it’s certainly something that Vanguard is monitoring as well.

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