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By HaleStewart November 12, 2017 7:59 am
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International Economic Week in Review: A Very Light Week of News

            This was a light week of news.

            Markit released their latest services and composite indicators for the EU.  While both dropped (the former by .8 to 55, the latter by .7 to 56), each remains at expansionary levels.  More importantly, overall production was very strong: France’s number was 57.4; Germany’s was 56; Spain’s was 55.1 (especially impressive considering the country is in the middle of constitutional crisis); Italy’s was 53.9.  This was the only news for the EU. 

            Markit’s Japan numbers rebounded strongly.  The services number rose 2.4 points to 52.4 while the composite number advanced 1.7 points to 53.4.  New business increased at the strongest pace since 2Q13.  The BOJ released their latest meeting minutes, which observed a strong and growing economy.  Finally, while the LEIs and CEIs dropped, the overall trend for both remains positive:

            Bank of Canada’s chief banker Stephen Poloz gave a great speech earlier in the week where we argued that the following factors are containing global inflation:

Globalization

Globalization could affect prices in a few ways. An obvious one is linked to the movement over the years toward more open trade. When companies are exposed to increased competition in global markets, they face pressure to cut costs and hold down prices. Similarly, consumers have access to a greater supply of imports from lower-cost, emerging-market producers, also dampening inflation. This impact became particularly important for manufactured goods early in the 2000s, after China joined the World Trade Organization, and it could still be at work.

A related idea is that global economic slack is becoming more important for domestic inflation, and domestic slack less so. Since the global economy has become more integrated, excess global supply might hold down inflation, particularly of some goods, regardless of the supply-demand balance in any individual economy. Companies need to worry about competition from other countries, not just local competitors, when deciding whether to raise prices.

The integration of companies in global value chains could also dampen inflation. Since various production stages can be moved to where costs are lowest, companies and their workers face additional competitive pressure to keep down prices and wages.

The digital economy

Another set of factors that may be acting as a drag on inflation is related to digitalization of the economy. This could affect inflation in at least three ways.

First, there is the direct impact of price changes for information and communications technology (ICT). Given how computer and home electronics prices have plunged over the years, it seems intuitive that lower ICT prices could push down inflation.

Second, digitalization has an impact on competition and market structure. In many sectors, digitalization has lowered barriers for the creation of new firms and increased competition. We have seen the disruptions caused by companies such as Uber and Airbnb. There is also the impact of e-commerce—the so-called Amazon effect—which can certainly affect how firms set prices. Think of how easy it is to check a competitor’s price on your phone while you are in a store, considering a purchase.

Third, digitalization can make business processes more efficient, improving productivity and leading to slower price increases. Indeed, productivity has increased more quickly than wages over the past year, roughly coinciding with the weaker inflation that we have seen.

The entire speech is worth a read.

In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors. 

 

           

            

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