Innovation in the face of inflation

The Government’s latest effort to take charge of the run-away economic system is to cut back on fuel subsidies and print an estimated trillion rupees to keep the country afloat. The newly appointed Prime Minister cum Minister of Finance Ranil Wickremesinghe on Wednesday went on to suggest that inflation could rise well above 40%.

Inflation, while certainly not a new phenomenon, is a pressure point on the population struggling to save and earn positive real income. Similar pains were experienced towards the end of the Civil war and further back as the late 70s to early 80s with high double-digit price level rises. What makes this period unique is the unique combination of local and foreign factors that may suggest it is almost never ‘transitory’.

High fuel and raw material costs, transportation bottlenecks and even longer-term pressures like an ageing population – these unprecedented inflationary factors are now present in every economy that is globally unavoidable. Therefore, the market is right for technological change that could shift the mechanics around pricing in ways that are hard to predict. Moreover, technological innovation itself lowers costs. 

According to research by Investment Bank Morgan Stanley, short-term spikes aside, commodity prices have been on a downwards trend for around two centuries. This is attributed to the major energy source of the time becoming too expensive and causing a new one to take its place. The change such innovation could bring is arguably the only major disinflationary trend right now that Sri Lankan leaders would be wise to consider.

For example, the clean energy transition. Demand for electric vehicles may disrupt fuel demand as more people are priced out of more expensive non-electric vehicles. Therefore, while green vehicles and renewable energy plants may be more metal-intensive than the technologies they are replacing, they only cause energy prices to rise further in the foreseeable short term. This suggests the need to look beyond the available technology and innovate while looking at cost effective alternatives.

For example, the largest corporations Amazon, Walmart and Costco, for example, are avoiding many of the aforementioned inflationary problems with innovation. Those innovations include more vertical process integration through owning rather than renting some of their own shipping containers to allow more control, but also technology such as by using artificial intelligence systems to better track deliveries. Autonomous vehicles on land and sea have renewed interest with the first autonomous container vessel to be tested in Norway by the end of the year. Given smooth cheap transport supply chain-related delays and price pressures would begin to abate.

Ride sharing too sees a much-needed change. With Pick me revolutionising smart ride sharing in Sri Lanka, it has recently announced Hitch – a socio-pooling service to share rides and travel cost effectively. While much is to be disclosed about this roll out, it is encouraging to see players in the local tech space innovating that could possibly lead to cheaper alternatives. While future disruptions to the labor markets can also be expected for the same reasons, technology could perhaps play an important role in offsetting the inflationary pressures in services as well. Hospice services and aged care who will require more labor with a shrinking population and workforce could see immense increases to the productivity of existing healthcare workers and systems. According to Cathie Wood from Ark Investment Management, such innovations, which include autonomous mobility, blockchain, gene editing, adaptive robots and neural networks, a period of longer-term deflation than inflation can be seen, given the depth and breadth of their impact across all areas of business. With the global economy ever so fragmented over recent developments the opportunity is clear for technology-driven innovation that could eventually bring prices down.