Is the Rumor of Inflation’s Death Premature?

By Mark Eshman, ClearRock Chairman & CIO June 7, 2019 Insights

Photo Credit: Bloomberg News

Since 1913, the Consumer Price Index (CPI) has been the primary measurement of inflation.  Along with the unemployment rate, it is the economic indicator that attracts the most attention from both the business community and policy makers.  In fact, the Federal Reserve’s dual mandate is to keep both inflation and unemployment stable.  There have been few times in the past 100 years, when both have been at today’s low levels.  Why?

Everything is Cheaper, and Everyone Wins?

Mohamed El-Erian, chief economic advisor at Allianz recently wrote in “Project Syndicate” that the “Amazon/Google/Uber Effect has turbocharged a disinflationary process that began with the acceleration of globalization.”  More and more production and services are being brought online, which, among other things, diminishes the power of organized labor.  In today’s gig economy, why buy a car when its total cost of ownership is a multiple of commuting via Uber Pool.  Why pay retail for anything anymore when low prices are a click away on your laptop?  Everything is cheaper, and everyone wins.

Caution: May Be Habit-Forming

Or do they?  El-Erian makes an insightful point:  as more and more of the online and gig economy becomes concentrated in the hands of a few massive companies, at some point, their pricing power may begin to ratchet up consumer costs, and therefore inflation.  Once regulations are harmonized around the country for the two large ride sharing companies, the barriers to new entrants will be formidable.  As consumers become more habituated to them (think: smart phones), what’s to stop Uber and Lyft from moving prices higher?  Coupled with an ever-tightening labor market, it seems risky to assume that inflation is permanently under control.

In fact, should policy makers be caught flat-footed by not appreciating the dynamism in this new economy, inflationary tendencies could be exacerbated by their keeping interest rates too low for too long.

Whether we are living in a golden economic era or whether there has been some permanent improvement in the ability of the economy and its policymakers to achieve greater price stability and low unemployment will perhaps remain unanswerable, until it’s too late.


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Author Mark Eshman, ClearRock Chairman & CIO

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