Should CIOs Worry about Inflation?
The inflation rate in the U.S. has been running low for a long time. The percent change in the Consumer Price Index (CPI) over the five years ending in December 2017 was the lowest rate of price increase seen in half a century. Low inflation is a broad phenomenon that characterizes almost all the components of the CPI and countries. Globalization has been claimed to be the key factor driving inflation all the ways. However, this story is not fully convincing, and inflation may not have become globalized, as evinced by some observers. For example, the rigid structure of some economies may hinder the response of the pricing process to globalization.
I believe that globalization and technology both contribute to low inflation in the United States. Our empirical investigations show that there is a significant structural change in 2008 in the extended NKPC model for the U.S., and we present three additional findings that add to the literature on U.S. low inflation dynamics. First, technology and globalization can explain the low inflation in the United States. As the empirical results show, whether, in the total sample time or the segmented sample time interval, technology and globalization are almost all have significant explanatory. Second, judging from the changing trend of the impact of variables, the impact of the domestic and foreign output gap on domestic inflation is weakening, whereas the impact of technology on inflation is increasing. This finding indicates that we should take into account the developments in global economic performance and technology innovation trends in understanding the dynamic process of inflation. Third, globalization and technology have different effects on inflation in the United States. At present, technology appears to exert a stronger influence on U.S. inflation compared with globalization. Therefore, studies that neglect the role of technology and only pay attention to globalization are not likely to accurately capture trends in inflation dynamics.
The issue of low inflation has attracted the attention of increasing numbers of scholars and central banks in various countries. When talking about the problem of low inflation, people often talk about the causes of some old clichés, such as globalization, oil prices, and commodities. We show that technology is another important and often overlooked factor that causes low inflation. The pace of technological innovation is likely to remain an obstacle to central banks’ goal of 2% inflation. The impact of technology and globalization on inflation remains an issue, in that those two factors are important reasons for the difficulties that central banks face in achieving their mandates, and policy-makers must continue to monitor them.