Inflation seems to be mystifying the Fed and economists, but in my view it is because this is one of the rare times that the entire paradigm has changed. As a result of several things, inflation may not rise much again for many years despite the labor shortage now being experienced by many employers. Here is why and what changed.

Logistics are now completely different and far more efficient and faster than ever. With the opening of the new Panama Canal, super-sized container ships can now land at East Coast ports, including New York and avoid the costs of unloading in Los Angeles, reloading on trucks or trains and shipping across the country. As a result of far better software and AI, containers are now preloaded as they will be needed for unloading, so the goods are in order in the container in the order the importer will be moving them to trucks, or the way the end user, like a Walmart, needs it to be stacked. Huge savings in labor and no need to breakdown and resort.

Robots are now the employees in warehouses and can replace most of the labor required to unload, stock shelves, pick merchandise, and move it to loading docks. In a few years, there will be self-driving over the road trucks which will be loaded by robots and then driven to the finial destinations. No loading dock labor, no truck driver. The trucks will only stop to have their batteries recharged and then can drive all night and day. Delivery will be faster and cheaper.

All of this, and the fact that there is now almost no place on the planet where manufacturing or harvesting takes place that lacks accessible logistics, makes moving good or commodities much less expensive. AI is now taking over many functions, and it is just beginning o be implemented. Over the next several years, AI will control building operations, transport, customers service response, and many production functions. Professional work that was thought to to be required to be done in more expensive domestic offices, can now be done offshore by far less costly professionals with similar training, and skills.

For example, an engineer for data analysis in India costs $500 a month, while the same job in the US costs 10 to 15 times that. Soon the computer will do the analysis at almost no cost. Spreadsheet work is often now done in India over night, and there is now beginning to be AI to develop spreadsheets. AI is able to do diagnosis in some medical cases. Watson and other similar AI systems, are replacing human professionals in some roles and this is an accelerating system.

For CRE, there are now beginning to be systems that use sensors and AI to run a whole major building with little human oversight. One facilities manager can now sit in New York or wherever, and on an I Pad, he can control a whole portfolio. It is one of the businesses I am involved in, so I see what is possible to do. LED lights eliminate the need for as many maintenance people because they last ten years with no change out.

With advances now coming in these building control systems, there can be as much as 70% energy savings in buildings. Cars will be electric and many countries, like the Netherlands in five years when the new laws now in place outlaw fossil vehicles. In five years, there will be so many choices of electric and hydrogen cars and trucks that oil will never cost more than $70 and maybe $60 ever again. Fracking has been a game changer and now natural gas produced in the US and alternative energy will make oil far less in demand. Energy in five years will be a far lower-cost item. Battery technology is moving very rapidly now, so that it will make alternative energy solutions cost effective and drive down the cost of oil even more. They will also reduce the cost of power outages disruptions to offices and factories.

Most top economists agree that the current way productivity is measured misses a lot of productivity advances. How do you measure that now you can conduct business while driving or walking around on your smartphone? Lawyers no longer have to fly to other places to negotiate documents. Even closings now take place virtually with computer created signatures.

How do you measure the productivity improvements of these things? You cannot. In a growing number of cases, a tech line is handled by a robot who walks the customer through steps to fix their outage of the internet or phone, before a human tech is required, and even then the human can sometimes fix the issue remotely form anywhere in the world. How does Dell measure improved productivity accurately by having techs in India remotely control the customer's computer to repair the problem? Hotels are moving to no front desk to check in. In Japan, there is a whole hotel run by humanlike robots with little human interaction.

The point of all of this is that AI, logistics and instant communications are dramatically changing the way products and services are delivered and buildings and other infrastructure is operated. Wages will not rise as economies improve the way they used to because humans can now be replaced by robots. Energy costs will decline. If you control labor and energy, and you have low cost logistics, then inflation will remain subdued. Those are the primary drivers of higher inflation. Result, interest rates may remain lower than would normally be forecast in the world before AI as a result, even as the economy accelerates.

All of this creates many other major issues regarding how to fully employ labor, how to prevent the oil producing countries from exploding in revolutions as young people have no employment, or what happens to Russia as a world power when oil continues to decline in demand and price. Nothing good in life comes without a steep offsetting cost.

Instant Insights /

Continued Low Inflation and Rates

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