The question of how far inflation rises in 2017 will be critical to the performance of equities. Surveys point to an acceleration in wages this year, but the relentless march of tech disruption suggests core inflation may stay comfortably below 2.0%.
The retail sector epitomises this dynamic. Traditional department stores are suffering, but total retail sector profits rose strongly in Q3 2016. Companies such as Amazon are leading on e-commerce and are also using new technologies to streamline costs (e.g. employee training). Employment at non-store retailers has accelerated to record highs.
Established companies are expanding into sectors beyond their traditional purview. Toyota has invested in 15 technology start-ups through a $310m fund, focussing on AI, robotics, hydrogen-related technologies and even healthcare. Competition between large companies is intensifying, putting further downward pressure on prices.
Summary
- Inflation to stay low in 2017 despite higher wage growth
- Retail, manufacturing, transportation and insurance all ripe for disruption
- Global tech ‘platforms’ are bolstering competition, putting further downward pressure on prices
