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Demographics is destiny, but is it inflationary?

Demographics is destiny, but is it inflationary?

In my last column I discussed the cyclical outlook for inflation. It wasn’t my intention to re-visit the topic only a month later, but sometimes things happen when you least expect it: in this case the opening of a new chapter in an unfolding debate on whether ageing is inflationary or disinflationary.

In one corner are the traditionalists; those who believe that ageing of society is disinflationary. That is very much the conventional opinion as to how ageing impacts inflation and appears to be driven by the lessons learned from Japan. As Japanese consumers have aged, they have definitely consumed less, and that has had a meaningful disinflationary impact on the local economy.

In the other corner is the Bank for International Settlements (BIS). In 2015 they took the world by surprise when they argued (rather convincingly) in a research paper that ageing is actually inflationary.

Then in late February a new research paper from Oxford Economics dumped through my letterbox, siding with the conventional view that ageing is in fact deflationary.

The researchers found that, at least more recently, the share of elderly (65+ years of age) in advanced economies is highly negatively correlated with consumer price inflation. In the five years to 2015, an astonishing 47% of the cross-country variation in inflation rates can be explained by the number of 65-year-olds and older when measured as a percentage of the overall population.

They also found that, in the last 60 years, apart from a brief spell in the 1980s, the cross-country correlation between consumer price inflation and the share of elderly has been consistently negative.

That is particularly relevant in the context of last month’s column where I argued in favour of a short-term spike in inflation driven by cyclical factors. I am not suddenly walking away from that viewpoint, as I continue to believe that we could be in for a nasty surprise or two, as the year unfolds.

That said, central bankers weren’t born yesterday. They are often prepared to look beyond the near term, if they see a different picture unfolding longer term, and this could very well be one of those situations.

The more cynical side of me would even suggest that today’s central bankers probably wouldn’t mind falling behind the curve for a while.

The world is so indebted now that something rather drastic needs to happen. And, if central bankers are confident that inflation will indeed cool off again longer term, couldn’t we do with a healthy dose of debt destruction? That is precisely what a bout of inflation would result in.

Niels Clemen Jensen is founder & chief investment officer at Absolute Return Partners and a Citywire Wealth Manager columnist

Due to an editing error, the version of this column appearing in the edition of Citywire Wealth Manager published on 26 April incorrectly stated that Oxford Economics viewed ageing as inflationary. Citywire apologises for the error


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