Global inflation will stay low forever


    Last Thursday, the European Central Bank (ECB) lowered the interest rate further into the negative territory. The aim is to provide more stimulus to the European economy, though the ECB is also following the changed direction in the American monetary policy.

    But lowering the interest rates should also signalize a trust in a new downwards pressure on inflation. For investors, the inflation expectation is a very important issue, but a general low inflation environment could also act as a stabilizing factor for Emerging Market economies.

    Looking at inflation from a long-term perspective, it is natural that there will be regional differences, though many economies are so open, that the global development in inflation has a significant impact for the individual economy.

    Despite the rapidly growing focus on green energy or environmentally friendly energy sources, I keep the view that there is an energy surplus in the world. Or, explained in another way, there is only a very limited risk of an energy shortage apart from, for example, sudden short-term bottlenecks in oil production.

    Concerning the labor force, there will of course be some sectors in some countries that experience shortage of labor. But with a very broad and global view, there is no squeeze in sight in the global labor supply during the coming years.

    Partially, I have the same view on production capacity, which is currently sufficient, and in addition, the global industrial production is actually under pressure. Only the normal wastage of the production capacity will reduce it, though this effect might first become noticeable at the end of the coming decade.

    In my view, all these components are very important when judging the inflation outlook, where I expect inflation to stay low and under control for a very long time ahead.

    This will partly be caused by a subdued global growth, which isn’t too attractive, though a stable inflation environment is, after all, healthy for Emerging Market economies.

    Another factor, when considering the global inflation outlook is the ever-growing access to the internet. In the old Western economies, the expansion of the internet pressured the lowering of consumer prices. This deflationary effect will primarily impact the Emerging Markets over the next five years.

    For many, internet access is part everyday life, many even have access to the internet all-day via smartphones or similar gadgets. Currently, 4.4 billion people globally have access to the internet, which represents a fairly steep development. In 2015, the number was around 2 billion people, and the average of different estimates point at 6 billion people in 2022 – just three years from now. I regard this as a game changer in many ways, particularly in emerging economies.

    The first thought is that the development will increase the number of users on social medias. I am very convinced that this will become reality, i.e., leading social medias will grow even mightier. But in the very big picture, the macroeconomic consequences are more important.

    The countries that manage to deploy internet access to the broadest part of the population are those that I expect to benefit the most. It will integrate the rural areas more in the domestic economy, and it will, for example, open-up opportunity for more people to participate in free self-study classes. A better internet coverage could even slow down the urbanization, but I am very convinced that new internet users can compete in internet-based jobs that are internationally offered on internet platforms, like designing a logo for a business card.

    If this expectation is correct, then I argue that better access to education, or to internet-based jobs, etc. will benefit emerging economies the most. But a broader internet access in emerging countries also make these economies more efficient, and higher efficiency is equal to pressure that pulls costs down, i.e., also a better chance to keep inflation at a low level.

    There will be swings in food prices, which cannot be avoided. But the other core components that have a big influence on inflation like energy, labor supply, and production capacity will keep inflation low. Emerging economies with broader access to the internet will, as mentioned, make them more efficient. All-in-all, Emerging Market countries should benefit the most from this development in the coming five years, which again, should comfort global investors to allocate more investments towards Emerging Market countries.


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