The situation then was unusual, but now, 2 years later, it’s increasingly clear that inflation remains tame—significantly below the 2% annual target set by the makers of monetary policy in many developed nations.

Why is this happening, when the U.S. job market remains tight? And what does it mean for investors? To answer the first question, look no further than Moore’s Law, which explains how ever-cheaper and ever-better technology reverberates through the economy. Vanguard explained Moore’s Law in 2017, and its lessons still apply.

Inflation has been falling short of the Fed’s target

Policymakers at the Federal Reserve have had difficulty achieving their 2% inflation target.

Notes: Core inflation is measured by the Core Personal Consumption Expenditures Price Index (which excludes food and energy). Data cover January 1998 through March 2019.

Sources: Vanguard calculations, based on data from the U.S. Bureau of Economic Analysis, the U.S. Federal Reserve, and Thomson Reuters Datastream.

A closer look at Moore’s Law

Moore’s Law states that as technology improves, its relative price declines. The wholesale price of cell phones, for example, fell 13% in the United States in April 2017 from a year earlier. But Moore’s Law (coined by Intel co-founder Gordon Moore) is about more than tech products. Its indirect effects restrain prices in every corner of the economy.

According to the U.S. Bureau of Economic Analysis, the amount of technology used in producing goods and services more than doubled from 1997 to 2017, from 8 cents per $1 of output to 17 cents. The impact has been most pronounced in tech-intensive industries such as information technology and communications, professional services, and manufacturing. But as the figure below shows, even sectors that may seem less directly tied to technology—such as health care, education, and retail trade—have seen significant cost savings.

Our research suggests that declining input prices for computers and electronic products, computer design and services, and other technology inputs trimmed almost 0.5 percentage point per year from production costs from 2001 through 2017 and ultimately from wholesale prices. Without Moore’s Law, annualized U.S. inflation would have been almost 0.5 percentage point higher. Without technology’s price-suppressing effects, core inflation would be at 2% or more, achieving the Federal Reserve’s inflation target. The higher inflation that would have resulted would have forced the Fed to further raise interest rates.

Technology’s effects on prices, by industry

Using U.S. Producer Price Index data, which represents wholesalers, Vanguard has found that technology has reduced inflation by nearly 0.5 percentage point from 2001 through 2017. The inflationary impact of technology has been most pronounced in tech-intensive industries, such as information technology. But even sectors that would appear less directly tied to technology have seen significant cost savings, including education, health care, and construction.

Notes: Data cover January 2001 through December 2017. A basis point (bps) is one-hundredth of a percentage point.

Sources: Vanguard calculations, based on U.S. Bureau of Economic Analysis input-output tables and Thomson Reuters Datastream.

Implications of low inflation for investors

Vanguard expects the U.S. inflation rate to remain subdued over the next 10 years, with core inflation hovering around the Federal Reserve’s 2% target. Modest inflation should help boost economic growth, as interest rates are likely to remain low.

And technology’s role in dampening the effects of inflation should be mostly good news for bond investors, particularly retirees and others with relatively shorter time horizons. That’s because lower inflation preserves the value of a bond’s coupon payments, which remain fixed until the bond matures.

Low inflation should also support stocks, as lower input prices strengthen corporate profits. Persistently low inflation also restrains yields and makes less risky investments, such as money market funds, less attractive.

There is always a chance that materially stronger global growth, accommodative monetary policy, or economic shocks such as an all-out trade war could spur higher-than-expected inflation in the coming years. But we expect Moore’s Law and the pace of technology innovation to remain an obstacle to central bankers’ 2% goal.

Although investors concerned about higher-than-expected inflation may be tempted to allocate a portion of their portfolio to Treasury Inflation-Protected Securities (TIPS) or commodities as an inflation hedge, it’s important that any such moves be made in the context of a broad, long-term plan.


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Investments in bonds are subject to interest rate, credit, and inflation risk.