Has the relationship between interest rates and inflation broken down?

TL, DR: Low interest rates and elevated levels of liquidity no longer act as inflationary forces they once were, due to the ever-larger role of technology in the economy. Excess capital has fueled deflationary strategies for companies (i.e. automation; market share-first mentality; deferred monetization).
A few recent headlines:
A puzzle for central bankers: Solid growth but low inflation (ABC News 24 Aug. 2017)
US Inflation Remains Low, and That’s a Problem (New York Times 24 Jul. 2017)
Janet Yellen Says Low Inflation Still Major Source of Uncertainty (Bloomberg News 12 Jul. 2017)
The Federal Reserve faces a conundrum: after a period of extraordinarily low interest rates — not to mention unprecedented programs of bond purchases to anchor long term interest rates — inflation has remained doggedly low. The economy has recovered by most other measures: asset prices have rallied, employment rate is at 4.3%[1] — underemployment notwithstanding — and GDP per capita is at an all-time high[2].

Conventional wisdom posits that low interest rates (i) lead to higher business investments and consumption — why not make that hire or buy that house when your cost to borrow is so cheap? — therefore (ii) the greater demand for goods and services would lead to inflation.
In this cycle, I would argue that low rates actually have a deflationary component, and that technology’s prevalence acts as a structural suppressant on inflation. I don’t think low inflation is necessarily a bad thing — I’m quite ok with Amzn-Whole Foods providing me cheaper avocado toast, starting next week. It just makes the Fed’s job trickier, as it stares down the $4+trillion balance sheet it’s accumulated!
The risk-seeking capital spurred on by low rates goes on to fund companies that are inherently deflationary. At a high level, this has to do with the rise of the tech industry — IT is now 23% of the S&P 500 Index, the largest basket in the stock index[3], whereas financials have dipped to 13%. Tech companies usually run a deflationary playbook: offer lower prices powered by technology and connectivity, scale up, rinse and repeat. Amazon seeks to deliver goods for cheaper and faster than its competitors — now it has its sights on food & groceries, which is 14% of the Consumer Price Index (CPI) basket. Uber wants to transport you for a fraction of what taxi companies used to charge. Casper wants to bring luxury mattresses to the masses on the cheap.
In a low interest rate regime, public- and private-market investors are more willing to accept low near-term profits because present-valuing theoretically higher profits in the future is more palatable when 10-year Treasuries yield 2.2% than when they yield 5%. The likes of WeWork and Tesla bleed cash like it’s going out of business, and investors have so far rewarded them with patience and more capital. The investment dollars also go towards further automation, which has a deflationary effect. In effect, low interest rates subsidize my avo toast[4].
The counter argument is that the likes of Casper, or even Amazon, is not a meaningful part of the Consumer Price Index basket. I would argue, though, that it’s short sighted to only look at Amazon’s direct impact on inflation. In a competitive economy like the US, market-share growth leaders like Amazon and Uber should deter offline competitors from raising prices.
In addition, low interest rates go well beyond funding pure-play tech companies. Pick any industry basket — consumer staples, consumer discretionary, energy, financials — with the exception of real estate[5] and healthcare, and the combination of low rates and technology act as powerful deflationary forces. For example, accommodative interest rates — coupled with government subsidies and technology — have led to investments in solar energy, fracking, electric vehicles — all of which have acted as significant deflationary forces for energy prices.
As an optimist, I personally believe that much of the aforementioned technological advances would have taken place, regardless of the Fed keeping short term rates at 0–0.5%. I do, though, believe that the accommodative business environment has brought forward a lot of the innovations, allowed for aggressive market share-first, profits-later strategy, and valuations in many public and private companies have gotten unsustainably high.
What’s the Fed to do? Could raising interest rates actually have an inflationary effect by slowing innovation and deterring market-share-first mentalities? Perhaps, but housing might sell off on higher rates, and housing is the largest component of CPI. Higher immigration may act as an inflationary force, but that’s not exactly in the Federal Reserve’s purview. Perhaps Janet Yellen ought to ask Alexa…
[1] US Bureau of Labor Statistics.
[2] Federal Reserve Bank of St Louis. (https://fred.stlouisfed.org/series/A939RX0Q048SBEA)
[3] http://siblisresearch.com/data/sp-500-sector-weightings/
[4] Apparently that’s what kids these days call it…avo toast…
[5] Construction has been one of the last industries to be disrupted by technology. I believe that will change.
