Technology’s affect on Deflation: How does it work

We now live in a bipolar economic system, where there is a traditional and autonomous economy on one side. Both the former is prone to inflation and the latter to deflation. Although it may take some time, the emerging autonomous economic system is changing the rules of the economy. 

Nearly every industry is facing labor shortages, supply chain problems, and marges. The only way to get out of this mess is for companies to adopt technology and automation as soon as possible. Investors have the opportunity to look at companies that offer these technologies at a discounted price while simultaneously looking for opportunities in the down market. It’s shaping up as an investor’s perfect storm.

Our economic systems are not designed for today’s technologically driven world, where prices continue to fall, and technology drives growth. These systems were designed for an era of pre-technology in which capital and labor were interconnected, where growth was expected, inflation was possible, and money was made from inefficiency and scarcity. 

The pre-technology era is gone, but many investors and economists still believe that the economic systems of the past remain in place. The real world is changing rapidly. Technology’s price is dropping 1, just like it continues to change the way individuals think, work and play. This is because more people use digital goods and services, which means that the price of the technology will drop.

Read also: Long-term growth effects of advancing digitization

How does technology affect deflation?

Technology is deflationary for two primary reasons:

Technology decreases labor

Technological innovation can lead to automation, which makes industries more efficient and eliminates many jobs. Robots are replacing humans in factories. Microsoft’s Azure service makes it easier for companies to employ data center engineers. Retail workers are being laid off due to self-service checkout lines and in-store kiosks. This causes a drop in wages and employment which then reduces the demand for goods or services.

Technological innovation impacts the supply of goods or services

A growing number of industries and businesses are able to reach an important point thanks to technology. The production of goods is growing faster than consumer demand, and this is more than ever before. The pace of production is increasing, as well as the cost of goods and services. This makes it easier to meet consumer demand for certain goods. Deflation is inevitable when the supply of goods meets demand.

Software as a Service (SaaS) is one of the most prominent examples of this reality in action. SaaS companies can achieve high sales and earnings multiples. This is partly due to their ability to scale quickly and adds customers virtually free of charge. Zoom was the ideal poster child during the pandemic. Thousands of companies across the globe were forced into remote work within a short time. This drove extreme demand for remote conferencing software. Zoom was able to ramp up to meet that unexpected acceleration–without the need to increase the price of its service.

Technology is Deflationary It’s the Nature of the Beast
Source: The Inflation Calculator, 1983 Motorola DynaTAC cost $3,995

Read also: How can technology combat inflation?

SaaS is not an exception. The commodity space is undergoing many innovations that make it easier for producers and distributors to fill supply gaps efficiently and quickly. The overall energy cost is being reduced by fracking technology, advanced methods of detecting oil reserves, and advances in wind and solar. Record yields are being achieved by farmers, and dairy farmers have moved away from hand-milking cows to build robotic milking stations that can simultaneously milk multiple cows to increase their output. Streaming services have drastically reduced the cost of media consumption and enabled new market players to scale up and compete more effectively.

It is alarming to see that economists have not yet created a measure to assess the impact of technology on the economy. They have access to a lot of economic data, but they have yet to find any evidence that technology investments improve productivity. Capital investments are based on basic business principles. They increase profitability by reducing costs and/or enabling expansion to new markets. 

Technology is not an investment that increases labor costs, decreases profit margins, or raises prices for current goods and services. The goal is to find the right balance between lower prices and higher profit margins. Technology is accelerating the trend towards lower prices and increasing competition. This is making deflation more apparent. Economists will soon be able to uncover economic evidence that shows the link between technology investments and productivity boosts that support deflation.

The future of ubiquitous automation is near. The cost of AI training has been falling between 40% and 70% each year, creating a record-breaking inflationary force that will likely transform every sector in the next decade. Investors who are able to see beyond the current models and grasp the opportunities that lie ahead may be benefited from the deflation.




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