Capital Spending Could Counteract Inflation Pressure

American companies are increasing their investment in technology and another capital spending as they move out of the pandemic. If this investment boom persists, it will increase productivity and living standards and counter inflationary pressures.

Non-residential private investment grew 7.4% year-on-year, adjusted for inflation in 2021, the fastest pace since 2012, showing a strong recovery after a 5.3% decline in 2020.

The spending by businesses is likely to stay strong this year. Manufacturing firms surveyed by the Institute for Supply Management plan to raise capital expenditures by 7.7% in nominal terms in 2022. Whereas service firms are expected to raise their capital expenditure by 10.3%.

New investments are helping to increase productivity by increasing employee efficiency. Productivity, which measures worker productivity per working hour, increased by an average of 2.2% annually in 2020 and 2021,  from an average of 0.9% in 2011 to 2019 before the pandemic.

A more productive economy can result in more goods and services with the same number of hours worked. Over time it could raise workers' wages without pushing up inflation.