Hidden inflation trap of an ageing population

People aged over 80 are the fastest-growing age demographic in the world, but the working-age population is an increasingly scarce resource. That factoid on 80-year-olds was part of a report by investment company BlackRock, which analysed population projections from the United Nations while looking into an often-ignored cause of inflation: ageing.

Why have the inflation-inducing implications of ageing largely been ignored? Because in recent years ageing was thought to be a factor holding inflation down. The poster child for this was Japan, whose population has aged rapidly over the past few decades and which has experienced major deflation.

An older population consumes less than a working-age population – there is less demand, the economy deflates and prices decline. Ageing states like Germany – which has had more deaths than births since 1972 – have had trouble preventing deflation and even tried negative interest rates to stoke inflation.

In some of these countries a political economy emerged that further entrenched their ageing populations: as countries started ageing they pursued policies favouring older people over younger ones, causing younger people to grow increasingly disillusioned with their electoral systems and voting less.

Voter participation in Japan among people in their 20s fell from nearly 70% in the 1960s to under 40% after 2010, and there was a similar fall among people in their 30s – from near 80% voter participation to below 50%.

Meanwhile, voter participation in those over 70 bucked the trend in Japan and rose from below 50% to above 60%. Economists Mitsuru Katagiria, Hideki Konishib and Kozo Ueda credited this demographic shift with a change in the political dynamic to favour the inflation-quashing interests of older bondholders over younger workers. Not only was an ageing population deflationary, but older voters seemed to like low inflation because it preserved the value of their savings.

But Salt Funds Management economist Bevan Graham says everyone forgot about one thing when it came to the supposedly inflation-reducing properties of an ageing population: supply.

‘‘Japan has always been held up as the example in the world of the belief that ageing populations are actually disinflationary.

‘‘I think what happened there is that the ageing of Japan’s population was occurring at the same time that China was growing its role as being the factory of the world.

‘‘So Japan could age, and it could operate with very low productivity growth, because China was doing a lot of the manufacturing for them.’’

Graham says Japan could then import all the goods it needed and consume them at low global prices. And it could do this even as its dependency ratios – the number of people too old or too young to be in the labour force as a ratio compared to the working-age population – were high.

‘‘If dependency ratios are rising and productivity is zero, the goods still need to come from somewhere,’’ Graham says. Not just the goods, but services. As people age they consume more services, such as medical care, that are harder to automate or from which to get large productivity improvements.

Graham says our future ageing problem won’t be similar to Japan’s because China’s population is getting older and that, combined with the push towards ‘‘de-globalisation’’, means it is less able to be the factory of the world, and pick up the slack. He says India could step into that role, but it is far from a sure bet that it will.

Even if retirees stay working, people also tend to get less productive themselves past a certain age ...

And even if retirees stay working, people also tend to get less productive themselves past a certain age – so production across developed economies could be lower. An International Monetary Fund working paper examining Japanese workers in 2016 found the productivity of those workers increased until they were in their 40s, then in their 50s began to decline.

At an Institute of Directors conference last year, Massey University Professor Paul Spoonley spoke of how New Zealand was unlikely to reach the high levels of migration of the past because of changing demographics in China. He argued China’s population was ageing so in coming years it would probably pursue a path of restricting its most talented citizens from leaving the country.

There is a bright side – this might make firms treat their workers more like fixed assets that they can’t afford to part with. After all, the world just isn’t making as many workers as it used to.