Inflation is rearing its head again, and many fear a rerun of the 1970s scenario. But here’s the catch: the world today is vastly different from back then, mainly because of our access to information. It’s a game-changer. Think about it: a smartphone user today holds more data in the palm of their hand than the US President had in the early 1980s. Knowledge about inflation isn’t just abundant—it’s at our fingertips, dramatically altering how we deal with economic crises.
Let’s break down the causes of our current inflationary woes. Historically, inflation is a monetary phenomenon, and the recent surge can be pinned on three main drivers: the pandemic, the Russian invasion of Ukraine, and what’s now being termed ‘graaiflation.’ Yet, the root isn’t the pandemic itself but rather the global leadership’s response to it, magnified by the echo chambers of social media—where the line between information and disinformation blurs dangerously.
The reaction to the pandemic was unprecedented. Governments globally pumped money into the economy like there was no tomorrow—figuratively dropping cash from helicopters. In Europe, funds kept companies afloat to prevent layoffs, while in the U.S., the unemployed suddenly found themselves pocketing more from government aid than they did while employed. With bars shut and vacations cancelled, what was left for people to do? Shop online, of course, and thus, demand for goods surged, primarily sourced from factories in Asia. This unexpected spike led to a 30% jump in Chinese exports and a shortage of containers to ship all that merchandise, pushing prices up.
Second wave
Then came the second wave, triggered by Russia’s invasion of Ukraine. Wars are inherently inflationary, but the rapid spread of information (and misinformation) through social media amplified its effects, especially hitting energy and food prices hard.
But not all inflationary pressures are external shocks; some are reactions to inflation itself. In the 1970s, the infamous wage-price spiral was blamed on powerful trade unions. Today, it’s more about a price-profit spiral, where companies hike prices because they can—and often, because everyone else does. However, these increases often come without added value, risking consumer backlash and forced price reductions later.
This is where the immense power of information comes into play. Today’s consumers, armed with real-time data and the ability to shop globally, can make more informed choices, putting pressure on businesses to innovate competitively rather than simply inflate prices.
Delicate balance being challenged
Central banks have managed to keep inflation in check without tipping economies into recession, a delicate balance that’s now challenged as they contemplate interest rate cuts. They’re treading carefully, aware that the right information at the right time can sway markets dramatically.
So while we might not be ready to declare the death of inflation, we’re certainly better equipped to tackle it than we were five decades ago. Thanks to technological advancements in information dissemination and artificial intelligence, we’re witnessing a surge in productivity that parallels the booming eras of the Roaring Twenties and the tech-driven 1990s. So, while the specter of the 1970s looms large, our current economic narrative is being written on a very different script—one where information is not just power, it’s a policy tool.
Han Dieperink is chief investment officer at Auréus Asset Management. Earlier in his career, he was chief investment officer at Rabobank and Schretlen & Co.