Talking Point  

How changing face of cities could prevent higher inflation

How changing face of cities could prevent higher inflation

One of the outcomes of the changes to the way we live and work as a result of the pandemic could be long-term disinflation, according to Ed Smith, head of asset allocation research at Rathbones Unit Trust Management.

He says that while many trends and new patterns of work and consumption are becoming clear, there remains great uncertainty about how the changes will play out, but many of the indicators would indicate a general lack of inflation.

Smith said: “From what we have been hearing in the market, people have generally different views on working from home, but there seems to be a consensus that employees will work from home two or three days a week. That’s disinflationary as it means people will spend less on transport, while companies may rent less office space, which is also disinflationary.”

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Transportation and office expenses are considered by economists to be input costs for a business, that is, they are part of the costs of getting goods and services to the market, and when they rise they contribute to supply side inflation.

If both of those expenses fall, then the cost of bringing goods to market may also fall, with the result that there is less pressure on the price of those goods and services.

In such a scenario, the profitability of companies could rise, as costs fall but revenues remain largely the same within the economy.

Smith noted that shareholders are generally quite well off people, and so would be less likely to spend the extra money, and this reduces the level of demand in the economy, which acts as a peg on inflation. 

But he said: “The key thing is, do the workers who are saving money by not going to the office every day, spend the cash they have saved quickly or not? If they spend it, that would potentially be inflationary.”

Fears that inflation could rise sharply as economies re-open have been central to the steep sell-off in equity nd government bond markets since the start of February.