The words “technology”, or “blockchain” and “AI”, did not sully this week’s minutes of the last Reserve Board meeting, and the word “inflation” did not get a Guernsey in a speech by Governor Philip Lowe on Monday that was partly about technology.
In other words, those dots were not joined, which has been a source of wonder and frustration to me for some years now.
Central bankers tend to blame only a deficit of aggregate demand for low price growth, because that’s what they can control with interest rates.
They watch as awed spectators the advancement of technology, as Dr Lowe explained on Monday: “There are great advances being made in science: in the material sciences, in power generation and storage, in genetics and the health sciences, and in computing and artificial intelligence. It is hard to be sure how these will all play out … time will tell.”
“But a clear lesson from history is that advances in technology form the backbone upon which higher living standards are built.”
Yes, indeed, but join the dots, Governor. How does technology produce those higher living standards? Through lower prices.
At least one central banker is joining the dots: Charlie Evans, the President of the Chicago Fed, gave an interview to CNBC this week in which he described technology as the likely culprit in the refusal of inflation to get back up to the 2% target.
“We know that technology is disruptive. It’s changing a number of business models that used to be very successful, and you have to wonder if certain economic actors can continue to maintain their price margins, or if they are under threat from additional competition. And that could be an undercurrent for holding back inflation.”
It makes you wonder whether any central banker has read any books about the late 19th century.
Economic historians Nathan Balke and Robert Gordon, report that the years 1866-1899 saw only two annual periods of positive inflation (1880 and 1887). Five times the price index fell by more than 4%, twice by more than 6%.
Then, as now, technological advance was rapid. There was the invention of the internal combustion engine, steam turbine, telephone, typewriter, dishwasher, paper-strip photographic film, barbed wire, wearable contact lenses and traffic lights, among many other things that are still with us today.
Then in 1913 came the invention of the first modern central bank – that is, the Federal Reserve – and that became a turning point for prices.
According to the Westegg inflation calculator what cost $100 in the United States in 1813 would have cost just $51.13 in 1913.
Run the calculator for the period 1913 to the present day, and we find that what cost $100 when the Fed was born would require $2463.37 today.
That’s an average inflation rate of just above 3%, which might explain why the Fed – and the RBA – are so troubled by inflation that is stubbornly half that level.
But as Dr Lowe implies, perhaps this is good not bad, leading to higher living standards. All that lower interest rates have done is to inflate asset prices through speculation funded by cheap money, which periodically lowers those living standards by collapsing.