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Is technology deflationary?

by Investoradar

The recent hot topic in the financial world has been inflation. With all the stimulus plans released and trillions of money being pumped into the economy, some claim that hyperinflation will be happening soon and things will get out of control. While some others claim that it is only transitionary and the CPI (consumer pricing index) and PPI (producer pricing index) are high only because of the sudden release of demand and the blockage of the supply chain. However, the one thing that barely anyone has suggested is the possibility of deflation. We have not lived through a time where technology is fully dominating the world and I believe the rapid evolution of technology (especially after the acceleration from the pandemic) might actually cause deflationary pressure on the economy in the future.

One of the main characteristics of innovative technology is that it provides vastly improved efficiency and effectiveness. For example, we used to need to go out and buy groceries ourselves, but now we can just order it at home easily and have them delivered. New technologies are slowly revolutionising every industry across the economy and despite the obvious benefits, it also causes some negative externalities on the economy.

The power of technology is so impactful and dominant that one tech company is able to replace several other companies. The rise of Amazon (AMZN) and Amazon prime resulted in small grocery stores closing and the shrinkage of the mall industry as people don’t have the need to go to these places as often anymore. The rise of Netflix (NFLX) ended the DVD industry and dramatically reduces the demand for cinemas as we are now able to stream movies anywhere. Spotify (SPOT) wiped out the physical music record industry because everyone is streaming music on their phone now instead of buying vinyl and CDs, the list can go on and on. These are only some examples from the past and digital transformation will only accelerate quicker going forward.

A good present example is the rising popularity of electronic vehicles (EVs) and autonomous vehicles. Electrical and autonomous vehicle manufacturer Tesla (TSLA) is leading this transformation with its market cap reaching 1 trillion while traditional car manufacturers such as Ford (F) and BMW are also starting to introduce their own EVs. As more and more Evs replaces traditional vehicles, the demand for oil will slowly decrease over time. The demand for drivers may also decrease as well if autonomous vehicle becomes more reliable and popular in the future. The rise of AI and automation is also very concerning as it is poised to replace a lot of human work which will result in lower demand for blue-collar workers (which currently makes up the vast majority of society). The rise in Robotic Process Automation (RPA) is a good example. It allow companies to build, deploy, and manage software robots that emulate humans actions. These software robots can do things like understand what’s on a screen, complete the right keystrokes, navigate systems, identify and extract data, and perform a wide range of defined actions. The economy will be more polarised than it has ever been before. The tech industry will be booming and very concentrated yet the large majority of the other legacy industries (like oil and gas companies) will keep on contracting over time.

The small group of people that works in the tech industry will get wealthier while others people (especially blue-collar workers) will become worse off. This is due to the unbalance in sectors where the people who work in the lagging sector won’t be able to earn as much as before and might even be laid off due to the struggle of the company or the replacement by new technologies. The stock market will look fine as tech companies now make up a large percentage of the indexes but the real economy might struggle. Deflation will likely happen as companies aren’t able to raise prices because the majority of customers have less purchasing power than before. Whereas the small group of people who got wealthier wouldn’t suddenly consume a lot more goods as well. This will result in a fall in CPI and PPI and the unemployment rate will go up, this is not healthy for the economy as moderate inflation is needed for the economy to grow.

Technology and digital transformation is definitely the trend going forward and it is undeniably making our lives better right now by making everything more efficient and effective. However, we should also be aware of the possible backlash that the rise of technology might bring to the economy. I believe the government will need to set up policies to prevent the economy from further polarising. For example, they can increase taxes for tech companies to subsidise companies in struggling industries or maybe provide incentives to encourage factories to move back to the US so that more blue-collar workers can be employed. I’m looking forward to how technology will further transform our lives but I also hope that we take precautions accordingly so that the backlash will be as minimal as possible if it ever happens.

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