Pay Attention To The Population Factor In Inflation

Article/ ? Hong Xiaowen

In a world with an accelerated aging population, to what extent will population factors affect our judgment on the future macro-economy? Since the outbreak of the new crown epidemic, most major economies have adopted large-scale stimulus plans, which has led to rising global inflation expectations. But after the gradual recovery of the economy and the gradual abatement of the impact of the epidemic, can inflation really return to a lower level as many central banks wish? Are the main factors causing the rise of inflation mainly economic policies or structural factors such as demographic changes?

In the book population reversal, Charles Goodhart, Professor Emeritus of banking and finance at the London School of economics and economics, and manoje pradan, former managing director of Morgan Stanley, give the answers to the above questions based on the observation from the perspective of population.

Goodhart and pradan pointed out that in the past three decades, global inflation and interest rates have declined, and income inequality among countries has narrowed. These development achievements are mainly derived from the world demographic dividend and globalization dividend, while the world demographic dividend comes from China and Eastern European countries' accession to the world trade system, releasing a large number of labor force to the world labor market. At the same time, the two demographic characteristics in developed economies have also boosted the increase of global labor supply. One is because of the decline of birth rate after World War II, the dependency ratio (the ratio of dependent population to working age population) in developed countries has continued to decline; Secondly, the proportion of women engaged in paid work in the working age population has increased, and the participation rate of women in many social and economic fields has increased.

However, with the gradual decline of birth rates in developed countries, especially in European countries, Goodhart and pradan predicted that in the next 30 to 40 years, the birth rate will be lower than the level of population replacement, and the labor force growth in many countries will decline significantly. In the mainstream short-term forecast of macroeconomics, the quantity of labor force is always a given exogenous value, and its change is always ignored. However, Goodhart reminds the academic community that population is a vital endogenous factor to predict economic trends in the next decade or even longer, and the changes in the above-mentioned demographic structure will have an impact on productivity and economic growth.

Different from the mainstream paradigm of aging theory which focuses on the impact of the reduction of domestic labor force and the coping strategies of pension burden, Goodhart considers the impact of population structure change from the global level, and creatively proposes that the slowdown of globalization will aggravate the aging. This is because, with the rise of populism and economic nationalism in many countries, globalization, marked by cross-border flows of goods and services, migration of people and capital flows, will be blocked in some countries. Second, while manufactured goods and services can be produced elsewhere and then "transported" to their destinations, it is almost impossible to care for the elderly. These two factors make developed countries more and more dependent on their own labor resources.

According to the theory of this book, such a shortage of labor supply combined with the ultra loose policies adopted by the United States, Japan and other countries in response to the epidemic situation (resulting in excessive monetary growth), will further increase the level of inflation. In the United States, for example, unemployment benefits are so high that people are reluctant to accept low-income service jobs; In the UK, many low-income jobs and services are basically done by immigrants from Eastern Europe, but a large part of them have returned home due to the epidemic. As a result, Goodhart judged that wages in these countries would start to rise, and the rising status of labor would lead to the re enhancement of labor bargaining power, thus making inflation higher than the current expectations of most central banks.

Thus, the core issue of the book can be drawn out: the aging trend brought about by the global "demographic reversal" will increase the possibility of global inflation. Because a decline in the birth rate and an increase in the proportion of the elderly mean an increase in the global dependency ratio, the effect of consumption of the unproductive dependants (children and the elderly) on inflation will outweigh the deflationary effect of the output of the working population (the output of the working population is greater than its own consumption).

In fact, Goodhart and pradan do not deny that technology, capital and other factors offset the aging, but they emphasize that automation is a supplement to the global labor force rather than a substitute. Especially in an aging society, the increasingly important elderly care is a labor-intensive work, and the current technical conditions are difficult to meet the complex pension needs.

Perhaps we would think that the author underestimates the speed of technology upgrading iteration and the development space of automation. However, there is no doubt that the attempt of the two authors to incorporate the population structure and aging trend into the macroeconomic analysis framework and use it to explain the level of inflation expectations can help us to penetrate the fog of the epidemic and look at the global economic prospect from a different perspective. "In any case, the future will be totally different from the past."

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