Does demography predict inflation?

Demographic shifts, such as population ageing, have been suggested as possible explanations
for the past decade’s low inflation. We exploit cross-country variation in a long panel to identify age structure effects in inflation, controlling for standard monetary factors. A robust relationship emerges that accords with the lifecycle hypothesis. That is, inflationary pressure rises when the share of dependents increases and, conversely, subsides when the share of working age population increases. This relationship accounts for the bulk of trend inflation, for instance, about 7 percentage points of US disinflation since the 1980s. It predicts rising inflation over the coming decades.

That is from a new BIS paper by Mikael Juselius and Előd Takáts.


Scott Sumner had criticized this line of thinking recently [1]. I take a more nuanced opinion.

Different people at different ages have different nominal spending patterns. Young adults and the elderly can live relatively cheaply, while those who have children typically have greater spending needs. These changes impact nominal demand and as the share or size of these groups change over time it has a corresponding impact on nominal demand. That being said, the central bank can adjust the money supply to influence nominal GDP. They can either take these trends into account or they cannot. In the 70s, the central bank effectively responded to the huge influx of workers from the baby boom generation by increasing inflation to reduce the growth of real wages. So the central bank's response to the changing demographics caused the inflation. Under this theory, it wasn't necessarily the demographics themselves that caused the inflation. This is why I have harped on Scott in the past for not fully considering the impact of changes in trend growth of RGDP.


Interesting and I suspect that there is more research to be done in this field. I know Scott tends to defer to the Fed and money supply for these things. But what do we know of demand changes?

Since money is largely neutral, it doesn't really matter does it? The fact that a man worked for a dollar a day back in the US Civil War days is of no concern except as trivia today. Unless you are claiming 1 to 3% inflation has sizeable and real effects? 30% inflation yes, but 1-3%? Surely you jest, Shirley.

The "low inflation" was a slight of hand by government accountants and planners. It allowed them to postpone increases in wages and retirements. The inflation is there it just isn't in the basket of goods and services being counted.

Thoughts on 9/11? Inside job?

To be fair, the idea that "The inflation is there it just isn't in the basket of goods and services being counted." is behind the used of hedonic inflation adjustments by the CPI.

/ " ...inflationary pressure rises when the share of dependents increases and, conversely, subsides when the share of working age population increases."

... what the heck is "inflationary pressure" ??

gotta luv these exacting & precise terms tossed around by academics

what causes inflation ?

"inflation" is a general and continuing increase in prices that can only be caused by increases in the money supply. who controls the money supply?

"'inflation' is a general and continuing increase in prices that can only be caused by increases in the money supply. who controls the money supply?"

Is it Jews? They keep poisoning my wells.

"Is it Jews?"

You are 80 years too late and on the wrong continent. In today's Trumpian terminology "Is it the Latino rapists, murders and drug dealers?"

I knew it was Mexicans. Even when it was monetary aggregates, I k ew it was Mexicans.

Trump isn't just racist* against Mexicans - there are surely white rapists, murders and drug dealers in America - Trump is also racist* against refugees from Honduras and all those other countries south of Mexico. They all look the same.

*Trump will make exceptions to his racism if brown people are willing to work for minimum wage at Mar-A-Lago

They come through Mexico. For all practical purposes, they are as Mexican as an American judge.

Inflation can be caused by a general drop in economic productivity as well as an increase in the money supply. This post is a very unsurprising confirmation of the law of supply and demand: if there's a spike in the rate people drop out of the labor force by retirement, total production drops while the supply of money might not. All else being equal (spending patterns of the retired, etc) this will lead to inflation as the same dollars compete for a reduced production total.

The only interesting part is if there are correlated counter factors that would break the "all else being equal" condition.

If there is somehow a drop in the demand for money, then the CB needs to adjust the money supply. So you are simply saying the same thing as Sumner, the CB can choose whatever inflation rate it wants so it is responsible for inflation if it occurs.

Thanks for using 'demography' rather than 'demographics'

Very interesting and further research needed.

Impact of wars and disease (Spanish flu for example).

Family size responds to economic factors. i.e. as income goes up the family size decreases, so what drives an increase in the share of dependents. (Wars cause populations to fall and then increase with peace.)

Need to squeeze data a bit. But interesting.

Not sure it can or should be used to plot monetary policy

Rising asset prices and stagnant wages. What's to complain about? Well, I guess billionaires can complain about the high cost of mansions and yachts.

Since Reagan, the rise of dependency has soared as the GOP gaiined mmore and more power driving high inflation in decaying asset prices.

The stagnant wages has driven businesses to depend on the GOP to put more money in their pockets with tax cuts and debt funded entitlements so dependents on governments can buy more stuff from US businesses at high profits to inflate asset prices.

Of course, calling asset price increases inflation suggests suggests that the US is not really getting richer because the US would be producing less of global output than the asset prices suggest.

E.g., that without China trade, Apple stock would be worthless.

Imagine if China retaliates against the ZTE sanctions with sanctions blocking exports of Apple products. China could argue this is being done to cut the US trade deficit with China. To be fair, China would also prohibit exports of Microsoft, Dell, Google, Cisco products manufactured in China, as well.

This seems intuitive to this non-economist, perhaps because the (we) olds seem more price sensitive. Maybe just the long term effect of remembering old prices.

Did you read The Atlantic article on the 9.9%? It seems related to this and a few other MR posts. An aging, poor, 90% aren't going to drive much inflation.

It must be terrible to live under the heavy boot of an oligarchy -- sorry, I meant, an aristocracy. While the mighty live in unparalled splendor, the populace lives in quiet despair.o

I confess the last econ course I took ended in May 1972. Then, the talk was cost-push and war-related inflation. I think (dangerous) the so-called Great Society also provided inflationary momentum: more money pursuing relatively fewer private goods and services.

The demography of the 1970's and 1980's - huge inflation - was large cohorts of young. baby-boomers coming of age economically. So, demography can be a predictor, either way: aged or youhtful. There were many inflation contributors.

Similarly, the rooster's crowing predicts the sunrise.

Correlation is not causation. Which would be first observed, inflation or a demography change?

Maybe in 2018, the old people with the money don't buy the stuff contained in the US government inflation index regime.

Are the elderly classified as dependents in the statement 'inflationary pressure rises when the share of dependents increases'? If so, shouldn't Japan have higher inflation?

First question: yes they are
Second question: good question

Then it is settled? Humans are mortal.

Could be.

Back in the 1970s and 1980s I had all sort of opinions on macroeconomic questions like the causes of inflation.

Now I don't.

Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.

literally came here to post this quote

New money injected into the economy has an inevitable ripple effect; early receivers of the new money spend more and bid up prices, while later receivers or those on fixed incomes find the prices of the goods they must buy unaccountably rising, while their own incomes lag behind or remain the same. Monetary inflation, in other words, not only raises prices and destroys the value of the currency unit; it also acts as a giant system of expropriation of the late receivers by the counterfeiters themselves and by the other early receivers. Monetary expansion is a massive scheme of hidden redistribution.

I dunno.

Inflation is dead in Japan.

Latest core CPI up 0.4%, April YOY.

This dead inflation after the Bank of Japan bought 45% of JGBs, and a lot of stock. Interest rates at zero, or negative. Big government deficits.

Japan has rising dependency----old people.

They also have 159 job openings for every job hunter.

What conventional macroeconomists cite as scripture....well, some sacrilege might be more useful at this point.

As we genuflect to the econo-voodoo totems of our choice, let us not waver in our certitudes.....

This seems a very plausible hypothesis, and unless ageing damage or indeed death by ageing is eliminated (and as a consequence pensions abolished) it does looks as though higher inflation is on the horizon.
Trade union activity is often blamed for driving inflation, but similar activity such as buyers' strikes could curb it. Somehow it seems more human nature to demand more wages than to direct similar anger at costs. Maybe it is just easier.

Sure, it's the increase in wages for the pond scum of society that produces inflation, we all know that. At the same time, increases in the price of common stock shares couldn't possibly be inflationary. Tesla's IPO was priced at $17/share and then reached $389.61 before succumbing to a small dose of reality. No inflation visible there.

Without the "pond scum" there would be no stock, and no stock quotations.
I have read before, and agree with, that anyone who buys stock should be aware that these are enterprises where (for example) people get up before dawn, commute for one to two hours, then put in a days work, and then commute home.
But the increase in stock quotations of companies with expectations such as Tesla enables these companies to sell more stock at higher prices in order to increase their workforces or equipment for the existing workforce to use. Some stockholders may complain about "dilution". But it is that mechanism that gives stock markets a purpose. Otherwise they'd have none.

A general increase in stock prices can't be much different than a general increase in wages. When shares are traded in a rising market the seller normally sells for more than he paid for those shares. He, and others like him, now have more money to spend on flat screen TVs, bass boats and magic phones.

I am not sure about fishing boats, but televisions and "telephones" (ie pocket computers) of given performance tend to fall in price rather than rise. I suppose people with more money than sense possibly throw away working examples of each simply to get the latest gee-whizz features. But hopefully they could give them to a charity shop if they can't find some "poor people of the parish" to benefit from them.

Inflation is been raising since our lifetime. It shows the increase in consumer index and measures the change in price level over time. During 2000 and 2008, Zimbabwe has experienced the highest inflation rate which is 735.6% worldwide. This situation occurs which the government prints out too much money in order to monetize the debt.

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