Economists and central bankers in the developed world are worrying about persistent low inflation – but few understand the role that digital disruption and the network economy are playing in this new economic landscape.
It has become a cornerstone of modern economic thinking that within developed economies a small amount of annual inflation is “a good thing”. But since 2008 inflation in the developed world has remained unusually and stubbornly low. Interest rates were slashed following the financial crisis in an attempt to promote borrowing and get economies moving again. This was followed by massive quantitative easing to further boost economic activity. But the expected inflationary response has not occurred.
One new factor contributing to the phenomenon of economic growth and concurrent super-low inflation is the effects of digital disruption and the super-efficiencies of the network economy. Not only are we living in a new and wholly unfamiliar economic landscape but we no longer have adequate ways of measuring this new economy. The interest rates levers for manipulating economic output are far less powerful than they were in the analogue age.
Bitcoin: threatening the banks' monopoly
The proof of the micro-economic role played by digital disruption is all around us. In the finance sector, P2P and crowd-funded lending are holding down the price of traditional bank loans and mortgages while app-based money transfers and foreign exchange are eroding traditional bank charges. Bitcoin and the Blockchain ledger technology threaten the monopoly of traditional banking and new methods of making payments – Apple Pay, PayTM, Square, M-PESA, WeChat, Alipay, etc. – threaten the future margins of debit/credit card issuers.
In the general employment market, artificial intelligence is replacing workers in many administrative sectors and is keeping a firm downwards pressure on wage price inflation. Agile working enabled by the internet and piece-working distributed and delivered online is also keeping a downwards pressure on wages.
An artist's impression of artificial intelligence
Low-cost internet airlines hold down all other airfare prices. Hotel-room aggregation websites like Groupon, MyDala and Nuomi push down the prices of accommodation as do private accommodation apps like AirBnB and Stayzilla. Deal aggregation apps also hold down restaurant tariffs and the price of many other goods and services.
Price-comparison apps and websites are holding down the price of car insurance, home insurance, life insurance and many other types of financial products. They’re even keeping energy suppliers and insurers competitive.
The new accommodation stock via the likes of Airbnb
Alibaba, Ebay, Flipkart , Amazon and other online-only retailers are holding down the prices for retail goods that bricks-and-mortar stores can charge. Uber, Ola, Didi Kuaidi, Lyft and other taxi-hailing apps are holding down the prices traditional taxis can charge. The Uber app-based model is now spreading to other businesses such as deliveries.
There are few areas untouched by digital disruption and although big hikes in energy prices, climate-induced food shortages and deliberate government action may re-introduce some inflation into future economic cycles, it is likely that the friction-reducing capabilities of the digital economy will act to keep general inflation low for the foreseeable future.
Against such a background, the 1-2 per cent growth rates now being recorded in the developed economies actually suggest that quite robust growth is occurring. Economists and government advisors must now catch up, to understand and recognise the role being played by digital disruption, and to develop new and better tools to measure national economic performance – including network distribution and digital products and services. That way, governmental policies can be re-aligned to the actual needs of the digital economy.
All images courtesy of Wikipedia and Flickr