Would innovation stop inflation?

The FT has a new article by Rana Forooher entitled “How innovation could stop inflation“. The article focuses on how innovation is transforming all sort of industries, from energy to transport to computers. Lots of exciting things are happening.

After reading the article, I wondered why the FT had not entitled it “Why innovation could boost real GDP”. After all, you could remove all mention of “inflation” from the article, and still make the same basic points. So why are these issued framed in terms of inflation, and not in terms of RGDP growth?

If we were on the gold standard, the title would make perfect sense. Under a gold standard, global NGDP tends to rise at roughly the same rate as the gold stock. Anything that boosts global RGDP without boosting global gold stocks (a big assumption, BTW), tends to push the price level in the opposite direction. This explains why there was almost no long run inflation under the international gold standard.

For the same reason, if we currently had NGDP targeting then the title would also make perfect sense.

But we don’t have a gold standard and we don’t have NGDP targeting. We have inflation target, at 2%. So why would anyone expect long run technological change to have any impact on inflation? Why wouldn’t faster RGDP growth merely lead to faster NGDP growth, leaving the inflation rate stuck at 2% on average, over the long run?

Just to be clear, in this post I’m not being sarcastic, and I’m not taking some sort of weird market monetarist perspective. Unless I’m mistaken, a New Keynesian or an Austrian would be equally perplexed by this FT article. I’m sincerely asking the following question:

When reporters talk about inflation in this way (and it occurs quite often), exactly what are they assuming about the monetary regime?

Are they claiming that although the major central banks claim to target P, they actually target NGDP? If so, I hope they are correct. But does that assumption actually seem plausible?



35 Responses to “Would innovation stop inflation?”

  1. Gravatar of Gordon Gordon
    8. November 2021 at 12:41

    I’ve noticed that many Wall St analysts and consequently financial reporters still push the notion of “cost push” inflation. They continue to hold to the belief that tight labor markets, high energy prices, and strong economic growth leads to an “inflationary spiral”. So it’s no surprise that the FT article framed innovation in the way it did.

  2. Gravatar of Dzhaughn Dzhaughn
    8. November 2021 at 13:28

    Good blog post.

  3. Gravatar of bill bill
    8. November 2021 at 13:40

    My opinion is that reporters don’t have a thorough grasp on the differences of how monetary policy would function under gold vs fiat currency. They make those errors often when describing the impact of real changes and when seeing a price rise or drop in certain sectors.

  4. Gravatar of Danny Danny
    8. November 2021 at 13:47

    The resurgence of modest inflation has revealed so much muddled thinking on the subject by the punditocracy. There’s a near universal assumption that deficit spending will increase inflation. There’s a feeling that this current inflation is always on the verge of becoming uncontrollable. There’s barely an awareness that the Fed exists and what its primary goal is.

  5. Gravatar of Effem Effem
    8. November 2021 at 13:51

    I think they are just being sloppy. They intend to say something along the lines of “for a given level of nominal growth, productivity would lower inflation.”

    Even sloppier is rarely pointing out that despite all the “innovation” we perceive, productivity has been mediocre at best and for large chunks of the economy (e.g., housing) we are basically incapable of getting more productive.

  6. Gravatar of bill bill
    8. November 2021 at 14:28

    Potential example. I often read that the plague raised wages because there were fewer workers, but with no mention of fewer consumers.

  7. Gravatar of dtoh dtoh
    8. November 2021 at 14:49

    If you know that reporters write gobbledygook about subjects with which you are familiar, why do you assume that what they write about other subjects (e.g. Covid demographics) is NOT gobbledygook.

    It’s very difficult for me to recall a single article that I have read in the mass media in the last half century that evinced an accurate comprehension of subject matters with which I had any familiarity.

  8. Gravatar of Brian Brian
    8. November 2021 at 15:18

    My guess is that the author knows central banks target inflation but recent headlines have them believing that targeting will fail and inflation will be higher than intended, hence they will express some optimism that innovation will raise real output while all else is constant (in monetary policy).

  9. Gravatar of Rajat Rajat
    8. November 2021 at 17:01

    This is the second time you’ve commented on an article by Rana Foroohar. One more and I’ll be arranging an intervention.

  10. Gravatar of David S David S
    8. November 2021 at 17:49

    Rajat is onto something there….

    This post also gives me an opening to comment on a point you make in your book–that growth is deflationary. When I first read that it made something click in my rusty little brain. A society can potentially generate capital wealth faster than they grow their money supply–which is what inevitably happens under a commodity money system (even with fractional reserve banking). The 1800’s had steady long run inflation but plenty of financial instability because a central bank couldn’t do a reset on NGDP growth with fiat money. And if people hoard gold the situation gets even worse—for brief but notable periods.

    I might have muddled some of that. Maybe there will be no inflation in Zuckerberg’s Metaverse.

  11. Gravatar of Matthias Matthias
    8. November 2021 at 18:19

    David, you are confusing matters.

    There were lots of countries in the 19th century.

    The shining beacons of fractional reserve (and free banking) like Canada had no trouble with financial instability. Their neighbour to the South had most of the recurring financial instability of rich countries. Both were on a gold standard.

    A gold standard plus free banking gives you approximately stable ngdp (with almost negligible growth according to growth in the gold stock and innovations in finance. The whole matter is made a bit more complicated, because gold can enter or leave the country, and well functioning economies economise on expensive gold).

    Yes, if real GDP grows faster than ngdp you get deflation. But that’s fine, and doesn’t cause any problems.

    See George Selgin’s writing for details. Especially his book ‘Less than Zero’ about falling price levels in a growing economy.

  12. Gravatar of mbka mbka
    8. November 2021 at 18:41


    google Gell-Mann amnesia 😉

  13. Gravatar of Lizard Man Lizard Man
    8. November 2021 at 20:26


    Land was one of the most important forms of capital up until very recently. So a plague that wipes out a large portion of the population leaves the rest with better land. Also, in many places the plague brought emancipation to many serfs. So that too likely raised productivity.

  14. Gravatar of dtoh dtoh
    8. November 2021 at 21:38

    Tks. Didn’t know there was term for it, but doesn’t surprise me that Crichton came up with it. He was a smart guy.

  15. Gravatar of Ray Lopez Ray Lopez
    8. November 2021 at 21:42

    What ignorance from our host. Doesn’t he read the literature that says due to innovation we have deflation? Seriously? I’m tempted to say “what an idiot” but that would be rude.

    In other news: Letter to Editor, WSJ – 22/6/21 – “There is still uncertainty about what caused and ended the Great Inflation of the 1970s and early ’80s. Monetarists were disheartened to find the growth rates of the monetary aggregates changed little over the period. The federal-funds rate peaked above 20% in the early 1980s, causing many economists to conclude that high interest rates must have quelled the inflation.” – Dan Thornton, Des Peres, MO, “Mr. Thornton was V.P of the Fed Reserve Bank of St. Louis” https://research.stlouisfed.org/econ/thornton/jp/

    Sumner thinks he has it all figured out, but Dan Thornton is more humble, and smarter too.

  16. Gravatar of CrisisStudent CrisisStudent
    9. November 2021 at 00:48

    I am also bit puzzled by this narrative, but the way I reconcile myself with it is that this is about near-term productivity shocks unanticipated by the central bank, and hence affecting realized inflation.

  17. Gravatar of postkey postkey
    9. November 2021 at 01:16

    “A barrel of conventional crude oil contains the equivalent of roughly 4.5 years of continuous human labour; or around 11 years at 35 hours per week, 48 weeks of the year.  But the capitalist doesn’t pay for the value of the fuel, merely the cost of extracting it.  For a mere £49 (at pre-pandemic prices) the capitalist purchases £330,000 worth of work (at the current UK median wage).  It is the exploitation of fossil fuels rather than the exploitation of labour which generates the vast majority of the surplus value in an industrial economy. . . .”


    ‘Growth’ was ‘brought about’ by cheap oil?

    Unless there are massive productivity increases ‘we’ have 16 years?

    ‘Global peak oil production may have already happened in October of 2018 (https://energyskeptic.com/2020/will-covid-19-delay-peak-oil/ Table 1). It is likely the decline rate will be 6%, increasing exponentially by +0.015% a year (see post “Giant oil field decline rates and peak oil”). So, after 16 years remaining oil production will be just 10% of what it was at the peak.’

    maybe ten years?
    “ . . . our best estimate is that the net energy
    33:33 per barrel available for the global
    33:36 economy was about eight percent
    33:38 and that in over the next few years it
    33:42 will go down to zero percent
    33:44 uh best estimate at the moment is that
    33:46 actually the
    33:47 per average barrel of sweet crude
    33:51 uh we had the zero percent around 2022
    33:56 but there are ways and means of
    33:58 extending that so to be on the safe side
    34:00 here on our diagram
    34:02 we say that zero percent is definitely
    34:05 around 2030 . . .
    34:43 need net energy from oil and [if] it goes
    34:46 down to zero
    34:48 uh well we have collapsed not just
    34:50 collapse of the oil industry
    34:52 we have collapsed globally of the global
    34:54 industrial civilization this is what we
    34:56 are looking at at the moment . . . “

  18. Gravatar of Student Student
    9. November 2021 at 05:36

    I think reporters frame things using the hot catch words to get eye balls. Inflation is the hot topic right now, so they frame things that way.

  19. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    9. November 2021 at 06:25

    In an economic continuum, mass production requires concomitant mass consumption. Payrolls must be sufficient to buy the goods and services produced – at the asked prices.

    It is an incontrovertible fact. Nobel Laureate Dr. Milton Friedman famously said: “Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”

    #1 Chairman Jerome Powell: “there was a time when monetary policy aggregates were important determinants of inflation and that has not been the case for a long time”

    #2 Powell: “the correlation between different aggregates [like] M2 and inflation is just very, very low”.

    “The Humphrey-Hawkins Act of 1978 improved our procedures by requiring us to set money growth targets on a calendar-year basis.”

    Read: “Greenspan’s Fraud: How Two Decades of His Policies Have Undermined the Global Economy”

    “In July 1993, Chairman Greenspan informed Congress that the monetary aggregate, M2, had been “downgraded as a reliable indicator of financial conditions in the economy, ” reflecting the fact that “the historical relationships between money and income and between money and the price level [had] largely broken down.”

    Not so.

    Not only do economists not know a debit from a credit, but they can’t differentiate money from mud pie. Not even William Barnett can do it.

    There’s actually a perfect relationship between money flows and inflation. Inflation peaks in January 2022.

    – Michel de Nostradame

  20. Gravatar of Michael Rulle Michael Rulle
    9. November 2021 at 07:45

    My guess is the lack of understanding, not of inflation, or NGDP—etc., it is a lack of understanding technology. They may as well believe in Magic. After all, “science” can solve everything. I do not know what the technology equivalent word is of “innumerate”—-but that’s what it is.

  21. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    9. November 2021 at 09:16

    There’s no unified theory. And there’s a big gap between hitting N-gDp, and how it’s to be operationally accomplished. One is impossible without the other. And obviously, Sumner doesn’t trade futures.

  22. Gravatar of ssumner ssumner
    9. November 2021 at 10:50

    dtoh, You said:

    “why do you assume that what they write about other subjects (e.g. Covid demographics)”

    As you undoubtedly know, I am often quite critical of articles on Covid, so your claim is false.

    Rajat, I actually don’t pay much attention to the names of individual reporters; I think of it as a “FT article”. I have a very bad memory for names.

    David, You said:

    “The 1800’s had steady long run inflation ”

    Just to be clear, the long run rate was zero.

    Crisis student, In context, the article seems to be about long run trends.

  23. Gravatar of bill bill
    9. November 2021 at 12:29

    @ Lizard Man,
    Very good point. That makes sense. Thanks.

  24. Gravatar of rinat rinat
    9. November 2021 at 14:48

    “Yet, though all the changes we are observing tend in the direc-
    tion of a comprehensive central direction of economic activity,
    the universal struggle against competition promises to produce
    in the first instance something in many respects even worse, a
    state of affairs which can satisfy neither planners nor liberals: a
    sort of syndicalist or “corporative” organisation of industry, in
    which competition is more or less suppressed but planning is
    left in the hands of the independent monopolies of the separate
    industries.” – Road to Serfdom

    Nothing is more pertinent. Nothing has been more true.

    Wake up U.S. economists before it’s too late!

    And start pushing back against these thugs!

  25. Gravatar of dtoh dtoh
    9. November 2021 at 16:26


    I did not say you “ALWAYS” assume

    Also as an aside. These constant claims about statements being false are super annoying. It’s just like children screaming “I’m right.” I get it when it’s coming from from the slightly post-adolescent numbskulls that are employed by the NYT, but it’s a disappointment when I’m expecting your otherwise normally thoughtful critiques and commentary.

  26. Gravatar of Sven Sven
    10. November 2021 at 05:02

    When inflation becomes the central issue or when it gets out of control, irrational opinions come out occasionally. Even highly respectable people or institutions fall into that trap.

  27. Gravatar of Side Bar Side Bar
    11. November 2021 at 09:07

    The only real reason that headline says “inflation” and not “RGDP” is because “inflation” produces more readers. It is high brow click bate. The newspapermen have no incentive* and limited ability (as pointed out in other comments) to accurately inform readers on topics this complicated.

    *Except for people like you embarrassing them.

  28. Gravatar of Lizard Man Lizard Man
    11. November 2021 at 10:36

    I doubt that the article was thinking this, but wouldn’t stronger productivity growth make the job of a central bank easier, especially one with a dual mandate and a Public commitment to an average inflation target? I am thinking that whether they want to lower or raise inflation, stronger productivity growth means less of a steep tradeoff between employment and changes in NGDP growth, in the short term.

  29. Gravatar of ssumner ssumner
    11. November 2021 at 17:19

    dtoh, “False” is annoying? You said a week ago:

    “the analysis is garbage.”

    Garbage? Sorry to be so rude, but calling my earlier post “garbage” is false.

    You said a week ago:

    “You comment is beyond bizarre.”

    Sorry, but that’s false. It may be bizarre, but it’s certainly not beyond bizarre.

    BTW, I still think your claim here is false, as I NEVER assume any analysis in the news media is true, I always think for myself, and make up my own mind. In the post you are referring to I looked at the original data, I didn’t just rely on news reports. That’s how I knew that differing age demographics didn’t even come close to explaining away the Dem/GOP gap.

    Sorry, but I plan to keep using the highly insulting term ‘false’ for claims about my blog that are wrong, and you can keep using polite terms like “garbage” and “bizarre” for my claims.

    Lizard, That’s plausible, at least in the political sense of “easier”.

  30. Gravatar of David S David S
    12. November 2021 at 03:37

    Scott, I had to go back to your book and stare at the graphs of historical price levels for ten minutes to process the error I made in my comment. Since I’ve only ever known fiat money and a world with inflation it’s very hard to accept that things weren’t like that for such a long period of time. Even descriptions of Japan feel fictional–like they’re a thought experiment that someone like you or Krugman is casually discussing in a college classroom.

    As you’ve pointed out a few times, a zero inflation economy has an intuitive appeal. It “feels” right–and because of that I have a small amount of sympathy for people who want a gold standard or some monetary policy that promises to anchor price levels across decades.

    I suppose monetary policy has no place for nostalgia. We have an NGDP futures market instead.

  31. Gravatar of dtoh dtoh
    12. November 2021 at 07:28


    Just to be clear ….

    I didn’t say your use of the “false” claim was rude or impolite… just annoying.

    I don’t much mind rude, but I find muddleheadedness irksome and so am occasionally unable to avoid comment on it when it makes one of its periodic protuberances in your otherwise normally enjoyable and insightful posts.

    Also BTW, I didn’t say your post was garbage… just that the analysis in the post was garbage…. 🙂

  32. Gravatar of Brian Donohue Brian Donohue
    12. November 2021 at 08:48


    What do you think of these theses:

    The Fed has close to full control over inflation.

    The Fed has zero direct control over the “real yield curve”.

    QE, particularly QE3, widely seen as “holding down interest rates” was instead trying to stem the 4 decade decline in “real” interest rates (which seems to me to be a largely exogenous demographic phenomenon), which arguably it did for several years, judging by the path of 30-year TIPS. Not that they are “targeting” a “real yield curve”- they can’t target any “real” variable, presumably NGDP or inflation is what they are aiming at – but, ex post, the behavior of real interest rates is a judgment on monetary policy.

    For example, if the Fed raises rates, either the whole curve moves up (presumably what they are aiming for), or the curve inverts if long-term real rates fall, which makes the tightening look in retrospect like a mistake. Of course, all of this would be carefully telegraphed, but the real interest rate response seems important to me in checking Fed hikes.

    By the way, real rates can surely be negative, contra Austrian postulates. I know you know this, but since nominal rates can’t really go much negative, inflation is the only way to accommodate this largely exogenous trend if it continues.

    Also, we have $30 trillion on the credit card now. Isn’t some kind of devaluation on the cards?

  33. Gravatar of Brian Donohue Brian Donohue
    12. November 2021 at 09:00


    The global supply chains established this century have brought more than a billion people into the formal international economy. This is a classic case of the incrementally deflationary background created by capitalism. You could call it productivity growth, but it is expressed as a factor mitigating CPI increases, requiring developed world monetary authorities to run looser just to keep prices level.

    That’s all stopped now, maybe it’ll kick into gear again, but just like how after 2008 everybody relearned the value of cash, after 2020, everybody is relearning that robustness, and not just efficiency, is a key element of an anti-fragile system, so I don’t expect the deflationary background to continue working its magic for a while.

  34. Gravatar of ssumner ssumner
    12. November 2021 at 10:07

    dtoh, You said: “Also BTW, I didn’t say your post was garbage… just that the analysis in the post was garbage….”


    Brian, You said:

    “Isn’t some kind of devaluation on the cards?”

    Not according to the markets (I have a post on that planned.)

    As for what we “learned” in 2020, it should have been that globalization reduces shortages. Imagine if we had not been able to rely on China for things like masks, and had to make them ourselves! China moves 10 times as fast as our producers.

    And no, globalization did not hold down inflation, the reduction was caused by slow NGDP growth. The only way globalization can reduce inflation is by boosting RGDP growth, which was faster back in the 1950-90 period

  35. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    12. November 2021 at 10:51

    re: “QE, particularly QE3, widely seen as “holding down interest rates” was instead trying to stem the 4 decade decline in “real” interest rates”

    It’s not as Larry Summers said: “He explained that the phenomenon (secular stagnation) entails excess savings combined with under-investment, along with very low real interest rates, economic sluggishness, high leverage and inflated asset prices, and “enhanced proclivity to financial crisis.”

    The excess of savings over real investment outlets is caused by the deceleration in velocity. The deceleration in velocity was caused by the impoundment of savings in the payment’s systems. It’s stock vs. flow. It was predicted in 1961 before Summers resurrected Alvin Hansen’s secular stagnation thesis in 2014.

    Capital does not continually flow into productivity improvement. Capital has been erroneously legislatively constrained (both by FDIC insurance and the complete deregulation of interest paid on bank deposits). Voluntary savings are not synonymous with the money supply.

    If savings are “lent’ to the commercial banks there is no change in the volume of deposits, no change in the volume of assets, nor any change in the volume of excess reserves. The only change that has taken place is the passive or negative change of total inactivity of the deposits.

    Bank-held savings have a zero payment’s velocity. I.e., bank-held savings destroy velocity. Banks do not loan out existing deposits, saved or otherwise. Banks pay for their earning assets with new money.

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