How Digitization can be an Inflation-Inhibiting Factor

How Digitization can be an Inflation-Inhibiting Factor

Inflation has returned rapidly and dramatically to the daily cost of living. It has also significantly increased the cost of doing business. All industries now face record energy prices and higher labour, supplies, and service costs.

Companies are trying to increase their profit margins in the face of high inflation. As a result, there is an opportunity to invest in technology-based sectors that can reduce costs and improve productivity.

Before we explain how digitization can inhibit inflation, let’s first understand the main reason behind inflation.

What Causes Inflation?

What causes inflation? Basically, higher wages and more jobs lead to higher household incomes, which in turn leads to increased consumer spending. This further increases aggregate demand, allowing firms to raise the prices of their products and services. Inflation increases when this happens in a large number of businesses and across many sectors.

Inflation Armor

In an inflationary environment, companies that can help customers increase productivity and decrease costs through automation, efficiency, or their own declining cost curves are attractive investments.

Prior to the pandemic, the MSCI World Index was used to calculate the valuations of these deflation enablers. This index tracks large-cap and medium-cap companies in developed markets. These companies experienced a surge in valuations. 

Companies that provide technology and services to reduce costs and increase efficiency are trading at a lower price than the wider market.

Three major technologies that touch most sectors and are at long-term inflection points are deflation enablers. They are artificial intelligence, clean and mass energy storage, and mobility.

  1. Artificial Intelligence

AI models are far more accurate than conventional models due to the availability of cheaper and more powerful computing resources. For example, the biotech industry has used machine learning and AI in order to find new cheaper drugs more efficiently, and faster than ever before. AI could also have a transformative effect in other industries. Investors should consider this opportunity as many companies are undervalued compared to the larger market.

  1. Clean Energy

It will take a long time to transition away from fossil fuels. This delicate balance is complicated by geopolitics and climate change. In the end, it will likely be highly inflationary. In fact, companies with unique, clean energy technologies will be able to increase their profit margins through increased investment. This will provide investors with greater value. It is generally recommended that investors focus on companies that benefit from the wider spread between rising utility bills and falling energy costs.

  1. Mass Energy Storage

A variety of industries could benefit from cheaper and more widely available battery storage. Long-haul and heavy-duty trucking, for example, have been under severe pressure from high fuel and labour costs as well as a shortage of workers. A transition to battery-powered vehicles may help reduce these costs. 

In addition, mass energy storage advances are expected to help further develop electric vehicles and, eventually, autonomous vehicles. However, battery technology is still far from its full potential. As a result, investors should look for opportunities for growth in this space as technologies become cheaper and end users can use their products and services at lower prices.

Digitization is an inflation-inhibiting factor

The increased use of digital technology is a smart idea to combat the inflation-increasing effect. Here are three major inflation-dampening effects:

  • Digital technologies allow for a more efficient business process and lower production costs. Digital technologies lead to higher resource productivity. This decreases dependence on fossil energy and emissions-related advances payments. As a result, the higher prices for greenhouse gas emissions that are required for climate protection are less important.
  • One way to solve the age-related shortage of labour is to increase the use of digital technology, robots, and machines.
  • Digital technologies and machines can replace human labour to cushion the inflationary effects of globalization. Furthermore, digitization reduces the production costs and therefore lowers a country’s price disadvantage compared to other low-wage nations.

Takeaway

In the end, rising prices reflect real shortages. This is when the demand for goods, raw materials, or production factors exceeds the supply.

Inflation can be countered by the tighter monetary policy if aggregate demand is stimulated by central banks lending heavily at very low-interest rates.

A restrictive monetary policy can also be fundamentally used to reduce price increases that cannot be attributed previously to an expansive monetary. However, the higher interest rates that are required to do this will result in a decrease in investment which can have a negative effect on production and employment.

However, even if the prices of goods rise, it is possible to close the gap between the demand and supply of goods by increasing efficiency and productivity. This calls for the development of corresponding innovations. 

A successful innovation policy and productivity policy are both anti-inflation policies.

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