Friday, March 27, 2015

Economy: Will Inflation Come Back Soon?

(Drivebycuriosity) - Today we are enjoying price stability. But will inflation (price level rises annualy 3% and more) come back soon?

I don´t think so. There are at least 4 reasons why the price level should stay stabile in the coming years:

1. Prices of manufactured goods are falling thanks to the technological progress. We are experiencing a new technological revolution that is raising productivity  significantly ( driveby). The advance of robotics, 3D-printing and other incarnations of automation  is reducing prices of manufactured goods considerably. The Internet, which gives access to a huge amount of data and reduces the costs of computing them, also lowers the cost of producing things. Therefore the production costs are sinking and the competition forces the producers to assgin the cost reductions to the consumers.

2. Automatization - and the growing importance of the Internet -  are also curbing the rise of salaries. Therefore the risk of a wage inflation (soaring prices because of higher salaries) is very low.

3. I reckon that oil and other commodity prices will be constrained in the coming years because  high prices in the reent five years (from 2009 till last year) encouraged production and curbed demand. We have therefore plenty of oil and other commodities which will be squeezing prices for a while. The ongoing technological progress also will continue to foster production of oil, metals and agricultural goods and reduce costs of oil exploration and planting crops. In other words: Producing   oil, wheat, aluminium, wheat, corn and other commodities will get cheaper thanks to advanced machines and other technologies.

4. The Federal Reserve already signaled interest hikes and will fight any sign of inflation in the coming years.

I believe we will enjoy some years with solid growth and just moderate rising prices.

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