Financial Education | 21 November, 2017

Demographic growth, key factor for inflation

Diego Balsa Portfolio Manager

The authorities, the various institutions and investors are surprised and wonder what is causing inflation in developed countries has remained at all-time lows since the outbreak of the crisis in 2008. The inflation has been no upturn despite the measures taken to stimulate the economy and fight off deflationary pressures:

  • Interest rates have been close to 0% or in negative figures for almost a decade.
  • The unemployment rate now stands at all-time lows in many regions and not even this appears to be pushing prices up in any significant way.
  • Unprecedented and extremely aggressive stimulus measures of various kinds have been applied.

The analysts find it really surprising and they even commented that the systems traditionally used to forecast price trends no longer work.

What might the reasons be then for such an atypical situation like this in which inflation has remained low for such a prolonged period?

Although there may be a number of reasons, fingers are increasingly pointing to two factors as the major causes of the deflationary pressures (one of them prevails, however, as the most important factor).

  • Firstly, debt levels in the developed economies are generally at all-time highs (higher even than during the Great Depression). These high debt levels would be exerting strong structural pressure on the economy and on inflation by reducing consumption and investment.
  • Secondly, demographic factors are identified as the main reason and most important cause of the high deflationary pressures we are currently experiencing.

The trend in inflation could be more constrained in the long term by growth in the economically active population in the USA

The graph shows how, over recent decades, both inflation and growth in the active population (the total number of working-age people) have gradually been falling to stand at historically low levels, and forecasts based on the demographic pyramid indicate that active population growth will fall further still over the next few years, which could put prices under even greater pressure.

BBVA IN SWITZERLAND


What are the reasons why the number of working-age people is barely increasing in developed countries?

This boils down to two main reasons:

  • Very low birth rates
  • Aging populations

After the end of WWII, there was a demographic boom in the developed countries which stretched into the 1960’s; this is the “baby-boom” generation and they account for a high percentage of the total population.

The problem is that the aging of this segment of the population coincides with low birth rates and higher life expectancy, fostering a generalised aging of the population in many countries.

One of the numerous consequences of this phenomenon is the negative impact it has on consumption, prices and growth, given that older age groups tend to be less prone to consuming.