Years of technological progress in drilling has resulted in a dramatic slide in crude oil prices. The Eagle Ford oil field is a microcosm of the shale revolution – production has continued to grow despite the rig count having peaked more than two years ago. That’s a powerful combination: limited incremental investment or working capital is required, but the yield continues to drive forward. That’s called productive disinflation, and it’s happening in many different sectors of the economy.
The implications of this phenomenon on monetary policy are enormous. The standard of living in the U.S. can actually improve without a tangible increase in wages. In fact, the technology revolution is dulling the increase in wages, despite clear tightness in many parts of the labor market today. However, net disposable income can increase because of the lack of inflation. Put another way, 4% wage growth is not too impressive if inflation is running at 5%.
The end result is that the middle class is enjoying a tremendous standard of living benefit because of the positive influence of technology. And the good news is that the Fed has nothing to do with that – monetary policy is only a passenger, in many ways, alongside the system-wide structural change brought on by the technology revolution.
Rick Rieder, Managing Director, is BlackRock’s Chief Investment Officer of Fundamental Fixed Income, Co-head of Americas Fixed Income, and is a regular contributor to The Blog. You can find more of his posts here.