AI productivity reveals a way out of inflation crunch | Opinion
We learned this month that inflation declined slightly in July, but at 3.4%, is still well above the Federal Reserve’s stated target of 2%.
While the Fed spends a lot of time and money pretending to manage
inflation, history suggests that the federal government (and its agent, the Federal Reserve) is much more effective at causing inflation than it is at reducing it.
There are three main culprits for the almost 20% inflation from 2021 to 2025, all of them substantially self-inflicted by the federal government: COVID stimulus money, supply chain disruptions following extended COVID lockdowns, and oil prices following the recent US military strikes on Iran.
Of course, inflation is only a problem at home if your income doesn’t keep pace with higher prices – which is exactly what’s happened since 2021. Median household income increased a very impressive 18% from 2021 to 2025, but that still trails the 20% increase in consumer prices.
Don’t hold your breath waiting for a decline in consumer prices. While the prices of certain goods (notably food and oil) fluctuate in each direction, a decline in overall consumer prices is very rare, happening only one year (2009) since 1956.
Inflation digs a hole in consumers’ budgets that almost always must be filled with higher real earnings. And higher real earnings can’t be magically created with a law or government policy. Increases in real wages ultimately follow increases in productivity, which typically result from technological improvements. Farms, factories, office workers, and transportation workers have all enjoyed increases in real income as technology increased productivity in those fields.
This is why I don’t understand the logic of the anti-AI crowd, especially those whose grievance is rooted in an income argument. The productivity increases resulting from the rapid technology improvements will do more to positively recalibrate wages to prices than the Federal Reserve can possibly accomplish.
The Fed’s most visible inflation-fighting tool is the Fed Funds rate. If inflation has increased as a result of consumer demand that is growing faster than the economy can produce, the Fed can raise interest rates in an attempt to “tap the breaks” on the economy.
But this year’s inflation increase is the result of a war-driven oil price spike, not an overheated economy. The Federal Reserve can’t produce a barrel of oil or reopen the Strait of Hormuz.
And unless the Fed has some secret weapon that will guarantee oil tankers safe passage through the strait, there is nothing it can do reduce supply-driven inflation caused by the war – although the federal government has repeatedly proven it is quite effective at causing it.
David Moon, president of Moon Capital Management, may be reached at david@mooncap.com.