Consumer demand during the Covid-19 lockdowns moved online as offline suppliers were shutdown [see photo]. The question now is will this become the norm for consumers as and when offline suppliers get going again. However... There is a much more important question lurking in the shadows. Are we all headed into a period of inflation or deflation?
Demand-pull inflation could be on our doorstep as those who formerly worked offline are recruited to work inside online networks [delivering food, products, information, payments, etc] and the result offline labour shortages lead to increased costs across the board. The key message in the marketplace will be that consumer demand has morphed into complex mix of online and offline factors that may well conspire to rise prices and thus to jump-start a bout of sustained inflation. Some commentators suggest that we are headed for a repeat of the well documented surge of prices as experienced in the 1970s in response to two OPEC oil shocks which lead to motorists queues that stretched for miles outside petrol stations. The government response to this phenomenon was to ration petrol while ramping up programs that redistributed taxpayer funds towards politically sensitive populations. Public and private budgets throughout the 1970s carried an overhang of up to or exceeding 20% which became known as the inflation tax. The consumers answer to the imposition of this inflation tax was to substitute high-quality goods and services with those that had perviously been considered to be of a lower quality. Thus the real impact of inflation tax in both the private and public sectors was to limit the total demand for goods and services.
Supply-push deflation could be on our doorstop too because during the Covid lockdowns money supply was ramped up to provide online money to those who could not go to work at their offline jobs. But that are encouraging signs recently that this historic spike in money supply is about to be quelled. Indeed the spike is in a nose dive which is bad news for all those assets that were highly inflated due to excess volatility in the money supply and large lumps of fiscal largesse during the pandemic. But beyond the confusing impact on markets of the price of government bonds lies the real purchasing power of the currency that consumers use in local and global online markets. If the currency is respected in the global online markets [when compared to competitors] then deflation will become a real issue for all economic activities performed online by those who use its digital purchasing power. Further, the 2021 mood in global Central Banks seems to be to push economic activity online where it can be more throughly monitored and regulated. Thus the hidden tax of supply-push deflation is yet more government intrusion and regulation of all online transactions.
Life online in 2021 is being shaped by the dual impacts of demand-pull inflation and supply-push deflation. In the short-term the inflation factor is of greater concern as it will lead to higher prices and then to actual shortages of products and services. But once this hiccup is cleared the real impact for those of you who choose to live online will come from supply-push deflation. This will create pockets of sharp asset price decline in the real economy, increased cost of debt due to the increased government regulation of money, less recourse to borrowing for businesses and households as lenders become more risk averse, etc.
Richard.
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