The deflationary engine is driving the world crazy

The deflationary engine is driving the world crazy

The Smartphone has changed everything- and us

Auckland, May 11, 2019

Best Smartphones thus far in 2019 (Photo from Tech.co)

The world changed in 2007 when Apple’s Steve Jobs held up the first iPhone.

Inflation dived, interest rates collapsed and share prices took off.

Newsroom Pro Managing Editor Bernard Hickey said that billions of people are carrying a deflationary engine in their pocket.

“The have effectively driven down prices in all sorts of areas,” he said.

Take taxis, which are being replaced with Uber or Zoomy that connect to drivers and share rides in a way that reduces cost. In turn that has driven down the cost of transport, and competes with public transport.

We send messages – free – with WhatsApp. Airbnb has introduced a whole new supply of rooms into the hotel market and depressed prices there.

There is no need to buy a camera anymore – you can use the one on your phone.

Workforce doubled

Hickey said that billions of users of smart phones have effectively doubled again the size of the global workforce.

“You can use your phone to access services you have never had available in the country before. And not only have prices dropped, in some cases they have disappeared. They seem free at least – of course we are paying for them with privacy.”

Hickey said that we are using our phones in a really aggressive way, in a reach far more than just talking to people on them. The use of GPS, cameras, and the ability to use data networks has infected the global economy in a way that continues to surprise officials and economists.

“They’re continuing to forecast inflation higher than we actually get. Part of the reason is this structural change in how the global economy is worked. You do have tactical inflation which happens when maybe the price of oil goes up … or when swine fever forces pork prices up. When things have recovered the prices will go back to normal.”

Supply shock

But structural inflation changes the price of widespread goods and services permanently.

That’s what happened when billions of iPhones were rolled out at a fast pace all around the world. It has changed the structure of industries, changed the nature of work, and changed the price of goods and services.

Economists call it a supply shock, when a whole bunch of extra supply of the thing you want has landed on the market.

When supply goes up and demand has not changed, prices go down, driving inflation lower.

When inflation falls below a certain level the Reserve Bank reacts by cutting the interest rates to try to stimulate the economy.

Hickey said that was one of the reasons the Reserve Bank Governor cut the Official Cash Rate (the rate it charges on loans to commercial banks) to a record low of 1.5%.

“It’s like oiling the wheels of the economy,” he said.

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