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The Continuous Debate on the Connection between an Ageing Population and Inflation

For more than a year, surging worldwide inflation has become a topic of hot discussion and concern for politicians, business leaders and the general public. After decades of low inflation, the situation has come as a shock with many people caught off guard. The situation was further exacerbated by ultra-loose monetary policies and supply chain disruptions due to COVID. This was compounded by the Russia-Ukraine war, which has led to disruptions in sectors such as energy, food and raw materials. The hike in inflation effectively risks the economy into recession and reduces many people’s living standards. Ageing populations have also been portrayed as key factors that drive up inflation. This perspective runs in stark contrast to approaches which suggest that population ageing actually reduces inflation. In this blog post, I will examine population ageing’s history, its effects on inflation, current conditions, and its broader implications.

For decades, many advanced economies have experienced extremely low levels of inflation.  There have been studies linking an ageing population with deflation pressures. The high proportion of older adults living in advanced economies may, at first, seem to suggest that it is difficult to escape from the low inflation trap. What follows are some ruminations on this topic: Firstly, the former governor of the Bank of Japan, Masaaki Shirakawa, suggested that ageing populations were connected to lower growth expectations, which led to significant reductions in investment. Commentators have termed this situation ‘shrinkonomics’. Secondly, older adults are often more reliant on their existing savings and pensions. As a consequence, they change their lifestyle and spend less, which contributes to weaker economic demand. Thirdly, increasing numbers of older adults prefer lower inflation because of its redistributive effects. Due to their political influence, many central banks could previously respond to these factors and maintain low levels of inflation .

That notwithstanding, studies demonstrate that an ageing population leads to workforce decreases and the likelihood of wage increases . During the pandemic, central banks applied ultra-loose monetary policies while disruptions in global supply chains, and global employment trends leading to career shifts, were experienced. In the post pandemic recovery, there was a demand shock, but the disrupted supply chain remained stagnant. Severe labour shortages have been widely reported across many economic sectors. Because older adults constitute a disproportionately high share of labour-force dropouts, they have been held responsible for driving up inflation. Some policies, such as those aimed at increasing birth rates, will take extensive periods of time to take effect; others, such as policies to increase immigration, are politically controversial. Nevertheless, businesses and policymakers are endeavouring to reintroduce more older adults into the workforce. Some of the latter return to work voluntarily because it is beneficial to their health and wellbeing. Others are forced to return to work due to the financial squeeze (particularly when they face higher than expected levels of inflation). As many employers recognise the need for and the benefit of older workers, they endeavour to provide more flexible working conditions and suitable environments to attract, retain, and support this demographic. Technical innovations, from digital learning platforms to robotics, can also assist older adults to obtain new skills, attain suitable work opportunities, and work more productively. There is an emerging trend of older adults returning to the workforce. If this trend continues, and the number of older workers increases, this may lead to a more age inclusive workforce like that of Japan .

Looking ahead, predictions suggest that policymakers will refrain from increasing interest rates too much because of their fear of recession. This is despite some commentators stating that a recession is necessary to tame inflation. Disruptions in supply chains  and  labour shortages will take some time to adjust before equilibrium can be maintained. Therefore,  higher levels of inflation are likely to remain for much longer than we may have hoped . The upshot of this is that we will have to accept this new economic environment by supporting lower income households and older adults struggling with reduced living standards. Inflation and population ageing are both complex topics. The debate regarding the connection between an ageing population and inflation will continue and the implications will undoubtedly be played out in politics, businesses, and in global living standards.

About the Authors:

Luc Yao is a Visiting Fellow at the Oxford Institute of Population Ageing. Luc is based in Darmstadt, Germany and is active in the electronics industry, related start-ups, and the Open Innovation networks.  His research at the Institute focuses on the adjacent domains of population ageing, innovations and strategic investments.

Opinions of the blogger is their own and not endorsed by the Institute

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