Is Technology Stealing Our Jobs or Our Inflation?

December 01, 2017
By Patrick V. Masso, CFA

Technology is the key determinant of economic productivity and growth.

Inflation is measured as the increase in prices of a basket of commonly purchased goods. Firms set prices in relation to their cost of production, which includes wages. To maintain profitability, as their input costs (including wages) increase, firms are (generally) forced to increase the price of their goods. Wages are determined by numerous factors, but, to put it simply, if the supply of available workers is low (low unemployment) the cost of wages increases. However, with contemporaneous low wage growth and low unemployment, something is stealing inflation.

The likely thief is technology. Technology is the key determinant of economic productivity and growth. As it improves, firms can use less capital and resources to produce the same amount of goods. The graph below compares the Price Index for All Goods (Red Line) against the Price Index for Technology-Related Goods (Blue Line) indexed since the start of the Financial Recession. The data tells us that, while the price of a basket for all goods produced in the U.S. has increased steadily, the price of technology-related goods has fallen nearly 30%. As goods and services become more ingrained with technology, the cost of production decreases. This decrease in cost enables firms to maintain their current price levels, leading to a low rate of inflation.

The question then becomes, if technology is used more and is supposedly stealing jobs, why does unemployment remain relatively low? Unemployment rates continue to stay at historically low rates (4.1% for November) compared to the peak of the 2008 financial crisis when rates reached 10% unemployment.

As mentioned in our November edition of Investment Insights, demographic changes have led to a slowdown in population growth. Additionally, the retiring of Baby Boomers and re-educating of workers have decreased the labor participation rate. At the least, the shift toward technology-driven production leads to an increase in temporary, short-term unemployment as workers need additional education or retraining.

While we have not witnessed an increase in unemployment due to technology stealing jobs, the improved productivity from technology has likely lowered costs to firms. This savings is being passed-through to the end consumer through constant price levels. Employees may be wary of the slow growth in their wages. Those concerned should remember that, due to current low inflation, their purchasing power remains level. This means that, while workers may not see an increase in earnings, their cost of living has not increased significantly.

Even though inflation is currently muted, some key events may bring more noise. Domestically, the Federal Reserve is likely to continue to increase the FED rate, pushing the cost of borrowing higher. As borrowing costs increase, firms may pass some of this cost onto consumers. Globally, geopolitical tensions remain high and, if international trade declines, this will directly impact the cost of goods and services. Within the labor market, as firms look for highly-qualified employees to utilize improving technologies, this may put upward pressure on wage growth. As described before, this wage increase will likely translate into a rise in price levels, which, definitionally, will lead to higher inflation.

The Investments Team continues to monitor labor market conditions and position portfolios to combat inflationary pressures as they arise. The Wealth Management Team at Heartland Bank and Trust Company strategically manages portfolios for all market conditions and makes tactical changes for current economic conditions.

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