IN FOCUS6-8 min read

The inflation debate: the deflationary forces being overlooked

Technology, innovation, fiscal dynamics and hidden slack in the global economy suggest inflationary pressures could prove transitory.

26/01/2022
robotic_deflation

Authors

Azad Zangana
Senior European Economist and Strategist

There are many deflationary forces at work in the global economy. These suggest that the current bout of inflation will, ultimately, prove transitory. This is the counter argument to our alternative imagined look at inflation: The view from 2030: how transitory inflation became permanent in the “roaring 2020s”.

Some key deflationary forces are:

>Technology and innovation

>Fiscal dynamics

>Labour market slack

>Ongoing globalisation

High levels of investment, particularly in new technologies, could lead to greater productivity growth justifying some of the wage increases which have been driving fears that inflationary pressures will persist. New investment in robotics, particularly combined with AI, has potential to lower costs and prices. Autonomous vehicles could be a key deflationary force.

You can watch the argument for deflation in full by clicking the play button on the video at the top of the screen.

Central banks are being forced to normalise interest rates in order to bring near-term inflation under control, this will have important implications from the perspective of fiscal dynamics. Higher debt servicing costs will eventually feed through into higher government debts and we expect governments will need to introduce austerity measures as a result. Such measures are deflationary.

Despite aging populations in many countries we think there is some hidden slack in labour markets. India in particular has a young population just entering its prime and these favourable demographics are often ignored in analysis of global labour markets. Additionally, the potential for greater female participation rates in many middle income countries should not be underestimated.

Globalisation still has a big role to play in lowering costs as production shifts to new countries. The recent trend towards onshoring is unlikely to be a permanent one. At the same time, governments are likely to remain focused on competitiveness and increasing productivity, which also has the potential to further lower costs and inflation.

More widely, governments are realising that the only sustainable way to increase wages is with higher productivity growth and green fiscal initiatives. And we expect central banks to become less tolerant of inflation as political imperatives could test their independence and use of monetary policies which have driven up asset prices and exacerbated wealth inequalities.

Subscribe to our insights

Visit our preference centre, where you can choose which Schroders Insights you would like to receive.

Authors

Azad Zangana
Senior European Economist and Strategist

Topics

Follow us

Please remember that the value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

This marketing material is for professional investors or advisers only. This site is not suitable for retail clients.

Issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU.

For illustrative purposes only and does not constitute a recommendation to invest in the above-mentioned security / sector / country.

Registered No: 1893220 England. Authorised and regulated by the Financial Conduct Authority.

For your security, communications may be recorded or monitored.

On 17 September 2018 our remaining dual priced funds converted to single pricing and a list of the funds affected can be found in our Changes to Funds. To view historic dual prices from the launch date to 14 September 2018 click on Historic prices.