Digitalization Could Save The World Economy From Runaway Inflation

Digitalization, the growing use of digital technologies in the ways businesses interact with each other and with their customers and suppliers, could cut the cost of producing goods and services, lower the bargaining power of unions, and save the world economy from runaway inflation.

Inflation is on everyone’s radar these days, as measures of price hikes across the economy are getting uglier. This week, the U.S. Bureau of Labor Statistics (BLS) reported that the Consumer Price Index (CPI) — a measure of the cost of living — rose at an annual rate of 7.5% in January, up from 7% in the previous month. That was the highest rise in the last 40 years.

The spike in inflation has created a great deal of anxiety both on Main Street and on Wall Street. On Main Street, inflation makes it hard for low-income Americans to afford basic things like food and heat. These people see the money they have saved lose its value as bank accounts pay little or no interest.

On Wall Street, investors are on edge. Inflation drives bond yields higher, making stocks less-appealing investments. Thus, the sell-off in equities following the release of inflation numbers.

Economic analysts are concerned that the problem of inflation won’t go away anytime soon, and it may become worse as price hikes lead to wage hikes, fueling a wage-price spiral that can aggravate the problem.

Digitalization may come to the rescue for a couple of reasons. One of them is that digital technologies like A.I. replace labor, making labor a dispensible resource and undermining the bargaining power of unions.

Digitalization raises labor productivity, cutting the costs of producing goods.

“Digitalization represents technological progress which, in general, always benefits society,” says Sarah Greene, Ph.D., lecturer in economics at Rensselaer Polytechnic Institute. “One of these benefits is a reduction in the cost of producing goods and services. Alone, this would lead to falling consumer prices.”

Digitalization helps restaurants mitigate rising supply chain costs, according to Dirk Izzo, president/G.M. of NCR Hospitality.

“Digitalization enables restaurant brands to be more productive so they can cover more tables and serve food with less staff,” says Izzo. “By doubling down on digital innovation, restauranteurs are extending the runway they have to do more with less – due to supply chain challenges and rising business costs. Smart use of technology is helping close the divide that exists between rising demand and the ability to meet that demand.”

Rising productivity leads to higher incomes and higher levels of consumer spending, setting the economy into a virtuous path of growth.

“Another general benefit of technological progress is rising income,” says Greene. “As digitalization allows businesses to be more productive, their revenues rise, and, in turn, they can pay more for labor. The result across the economy is higher national income. And if productivity is growing at a rate faster than the rate of population growth, then per capita income will grow also. Therefore, in a climate of technological progress and economic growth, regardless of the impetus, wages and salaries should rise. “

But these rises won’t lead to higher inflation, as higher productivity will compensate companies for the higher wage they pay. Thus, digitalization could save the U.S. and the world economies from spiking inflation.