Inflation's Next Dampener After Globalization Is Digitization

(Bloomberg) -- The European Central Bank’s struggle to revive inflation was highlighted again on Monday, and it won’t get any easier, according to one analysis that points the finger at digitization.

Commerzbank chief economist Joerg Kraemer said the ability to replace tasks currently carried out by humans “threatens many established professions, weakens the negotiating power of employees and lowers wage and price increases.” That trend is growing just as the previous inflation-dampener, globalization, falters under U.S. protectionism.

Monday’s data showed inflation in booming Germany, where record-low unemployment should be giving companies scope to raise prices, unexpectedly slowed to 1.4 percent in April. Economically weaker Italy saw price growth cool to 0.6 percent, and Portugal weakened to 0.3 percent. While Easter was a key factor last month, that doesn’t bode well for the ECB hitting its euro-area goal of just under 2 percent over the medium term.

Kraemer’s note was published just before those figures and cites work by the Institute for Employment Research showing that even for workers holding university degrees, nearly a quarter of their tasks can be carried out by a computer. The share rises to 58 percent for unskilled workers.

Inflation's Next Dampener After Globalization Is Digitization

“Employees whose activities are rationalized away by digitization do not immediately find new positions,” he said. “During the multi-year transition period, workers are unsettled. They are feeling the increasing competition from computers as well as the increased competition from Chinese factory workers.”

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Kraemer cited European Commission research showing the so-called Amazon effect of increased transparency that pushes companies to cut prices is “surprisingly low.” He also noted that digitization boosts productivity, which should ultimately lift wages and therefore prices. But in the meantime, inflation could stay low for years to come.

While that might sound like an argument for the ECB to continue its monetary stimulus, Kraemer warned such a strategy could lead to asset bubbles. Instead, he suggests a more fundamental change.

“The ECB should no longer follow a short-term but a long-term inflation target,” he said. “It should look through the multi-year phase of digitization-related low inflation and raise its key interest rates rapidly.”

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