Reserve Bank governor Adrian Orr. Photo: RNZ / Dom Thomas
The world changed in 2007 when Apple's Steve Jobs held up the first iPhone. Inflation dived, interest rates collapsed and share prices took off.
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Newsroom Pro’s managing editor Bernard Hickey says billions of people are carrying a deflationary engine in their pocket.
“They’ve effectively driven down prices in all sorts of areas,” he says.
Take taxis, which are being replaced with Uber or Zoomy that connect to drivers and share rides in a way that reduces cost. In turn that has has driven down the cost of transport, and competes with public transport.
We send messages – free - with WhatsApp. Airbnb has introduced a whole new supply of rooms into the hotel market and depressed prices there. There’s no need to buy a camera any more – you can use the one on your phone.
Hickey says billions of users of smart phones have effectively doubled again the size of the global workforce.
“You can use your phone to access services you’ve never had available in the country before,” he says.
“And not only have prices dropped, in some cases they’ve disappeared. They seem free at least – of course we’re paying for them with privacy.”
Hickey says we are using our phones in a really aggressive way, in a reach far more than just talking to people on them. The use of GPS, cameras, and the ability to use data networks has infected the global economy in a way that continues to surprise officials and economists.
“They’re continuing to forecast inflation higher than we actually get,” he says.
“Part of the reason is this structural change in how the global economy is worked.
“You do have tactical inflation which happens when maybe the price of oil goes up … or when swine fever forces pork prices up. When things have recovered the prices will go back to normal.”
But structural inflation changes the price of widespread goods and services permanently.
That’s what happened when billions of iPhones were rolled out at a fast pace all around the world. It has changed the structure of industries, changed the nature of work, and changed the price of goods and services.
Economists call it a supply shock, when a whole bunch of extra supply of the thing you want has landed on the market.
When supply goes up and demand hasn’t changed, prices go down, driving inflation lower.
When inflation falls below a certain level the Reserve Bank reacts by cutting the interest rates to try to stimulate the economy.
Hickey says that was one of the reasons the Reserve Bank governor this week cut the official cash rate – the rate of interest it charges on loans to commercial banks - to a record low of 1.5 percent.
“It’s like oiling the wheels of the economy,” he says.
Photo: RNZ