Inflation was up 0.5% in January and the CPI was up for 6.4% from the same period last year. Both numbers were higher than expected and have predictably caused the Federal Reserve to reflect and take a more hawkish stance. Shelter, Food and Energy remain the primary culprits boosting inflation numbers, of which shelter represents approximately 50%. While the markets anticipate a decline in shelter costs over the year this has proved stubbornly resilient to date. The next meaningful economic data announcements this month include "retail sales", the "monthly jobs report" and the consumer price index report for February.
You may be wondering why this article is titled "Will the Fourth Industrial Revolution Kill Inflation" and that is because we are on the cusp of paradigm shifting innovations which will unleash a "productivity revolution" unlike anything that has come before it. The combination of AI, Robotics and Quantum Computing to mention just a few will reinvent what is possible. The current Quantum Computer in development at Google is purported to be 158 million times faster than the fastest supercomputer on the planet. That is an unfathomable leap. AI (Artificial Intelligence) is expected to double in its capacity every 6 months. At the most rudimentary level, these technologies combined with advanced micro-devices that have the potential to monitor every item and point on any supply chain, will not only address "supply chain" imbalances but altogether drive logistical, material and sustainable efficiencies across entire industries. By addressing supply chain issues, one of the main contributors of inflation, we will see these technologies contribute powerful disinflationary forces.
However, while we are on the cusp of this 4th industrial revolution which has the potential to dwarf every previous industrial revolution combined, the current impact is in its infancy. Over time, the combination of the technologies mentioned, and many others have the power for generating exponential innovation and one of these changes will be a generative global disinflationary economic impact.
In the interim, while these innovative technologies are being advanced, the most likely course of action for taming inflation will be a less technologically sophisticated approach which will be more aggressive interest rate hikes. The Federal Reserve has been unwavering in its commitment to do whatever is necessary to reverse inflation. It has acted cautiously but they have signaled that they will continue to act if the signs do not conform to their goals. More aggressive interest rate hikes will slow economic growth and increase the risk of recession. There is a time-lag between Federal Reserve hiking rates and their economic impact. The economic data points to numerous economic signs of slowing which may take more time to show up in the data. Irrespective of economic data confirming a reversal in inflation, there is still a long way to go to get to the Federal Reserve's 2% per annum target. Whether 2% is a viable goal remains to be seen. As the fourth industrial revolution gets underway it will assist as a disinflationary force as it ushers in a exponential revolution in productivity.
