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Increasing productivity is one of the best ways to tame inflation.

Story Highlights:

  • Advances in productivity can make goods cheaper and more widely available, increase food yields and improve public health.
  • Recently, folks are fretting inflation's threat to their living standards.
  • We'd argue increasing productivity is one of the best ways to contain inflation.


Since the days our ancestors first hefted bow and arrow, humankind has strived for greater prosperity per ounce of energy expended. That a few humans could bring home more meat per hunter with the right tools gave birth to free time. And art, philosophy and science—the sons and daughters of free time—have repaid the favor many times over.

Today, ten thousand years on, it's the same song, sung on a bigger stage. Now the technology freeing our time takes the form of automated assembly lines, effective search engines and superior biotechnology. Advances in productivity (typically defined as economic output per unit of labor) can make goods cheaper and more widely available, increase food yields and improve public health—raising living standards for fewer dollars so more people can benefit.

But recently, folks are fretting inflation's threat to living standards. There are many who believe food or gas price increases are symptomatic of troubles to come.

Summer Warning: Gas Pains Ahead
By Elizabeth Strott, MSNMoney

Food Inflation Worst in 17 Years
By Staff, The Associated Press via MSNMoney

As we've mentioned before, fixating on one or a handful of goods in a market of many thousands doesn't accurately reflect inflation or the market's expectation for it. A better gauge of inflation expectations is global long-term bond rates, which continue to be historically low.

Still, some have decried the Fed's recent central bank rate-cutting as inflation fuel. That's not a wholly irrational view. After all, inflation is a monetary phenomenon: In a vacuum, more dollars chasing too few goods equals higher prices. But one healthy antidote to increasing inflation is increasing productivity. If the problem is more dollars chasing too few goods, better productivity can juice the supply side of the equation without increasing labor costs (at least, not much) and therefore prices.

Seem illogical? See it this way. Take a chocolate chip cookie operation. A baker invents the recipe for crunchy-on-the-outside, gooey-on-the-inside cookies bursting with chocolate-y goodness. Now, Mr. Bernanke has lowered rates which increases money supply, and the proud new owners of this money can't wait to satiate their addiction for chocolate chip cookies. Our baker is overwhelmed with orders but can't bake enough cookies to meet demand—so prices go up (that's cookie inflation!).

But instead of hiring additional workers and passing on the cost to consumers, our baker invents an automatic mixer to stir the cookie dough while he greases baking sheets—this gain in productivity allows more cookies to reach market for the same price. The consumers are happy—their cookies cost the same and they get them on demand! And the baker is really happy—he's selling more and earning more. Productivity gains work like that—they allow firms, whether they make cookies, sneakers or semi-conductors, to produce more or better (or both) goods at competitive prices. You have to love that.

And over recent years productivity has continued to grow, with a largely unheralded gain in the first quarter.

Productivity Improves in First Quarter
By Staff,

Productivity gains don't just lead to better cookies and cooler computers—they can keep those things at unobjectionable prices. And certainly, prices for most electronic goods just keep dropping. That flat screen TV you bought just three years ago probably retails now at a fraction of the cost you paid. (Sorry.) Don't be despondent. Instead, remember how increased productivity keeps prices overall in check, contributing to better living standards the world over for years to come.


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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.