June 21, 2017

IT'S A DEFLATIONARY EPOCH:

The truth about the Fed and inflation (Rick Rieder, BlackRock Chief Investment Officer of Global Fixed Income)

[W]e believe the excessive obsession some market watchers have with the Fed hewing to its 2% inflation target is shortsighted. Here's the truth about the Fed and inflation: The Fed adopted its 2% inflation target only quite recently, in 2012. Prior to that, the central bank was comfortable with an inflation level slightly lower than 2% and looked past the small variations around its previously preferred target range.

Today, massive technological disruptions and long-term demographic trends are remaking the inflation landscape, and we believe both investors and policy makers need to abandon an overly rigid view of price change.

Historically, technological innovation has proved to be deflationary, exerting downward pressure on prices. This is evident in the chart below, showing the drastic drop in computing and storage costs over the last 60 years. Based on the chart below, an iPhone in 1991 storage and computing cost dollars would be worth $1.44 million--per phone. An iPhone today costs a miniscule fraction of that.

Technological innovation is disrupting traditional business models of many industries, putting a lid on prices and influencing inflation in the economy overall. 

Posted by at June 21, 2017 7:07 AM

  

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