Inflation Series: Ageing Past The Tipping Point

But we are not convinced that its lesson is relevant to the rest of the world. Moreover, there is a significant body of research setting out well-reasoned and well-evidenced arguments for the inflationary consequences of ageing. 

We believe ageing creates both inflationary and deflationary forces. A permanent change in the age structure of a population — its demography — can alter patterns of consumption, saving and investment.

It can also affect the size of the workforce and its skillset, the rate of productivity growth, and the way in which income is distributed between labour and the owners of land and capital.

All these transitions can impact inflation, but in ways that can push in opposite directions. 

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Which way the balance tips may be determined by which age cohorts are growing or shrinking most rapidly. In this regard, ageing has just entered a new era.

We believe the next phase of ageing is likely to be inflationary, but not to any alarming extent. 

Saving less and spending more

A recent project called the National Transfer Accounts has confirmed what some economists have always suspected: consumption does not fall with age.

Indeed, spending continues to increase through the average lifetime, while incomes fall. 

The composition of an individual's spending tends to change with age — the very old spend very large sums on healthcare, either privately or via government programmes — but the fact remains the total amount of goods and services demanded does not decrease. 

Intuitively, an inflationary impulse occurs when the proportion of the population willing and able to work starts to shrink relative to those who are no longer 'productive' — in other words, when more and more non-workers compete for the goods and services produced by relatively fewer workers. The UK has only just reached that stage today.

Since the 1960s, the number of non-workers — the old and the young — has shrunk relative to the number of workers. We call this the 'dependency ratio', but it is reversing — and in some countries quite sharply.

The dependency ratio troughed in the UK around ten years ago (according to United Nations data) — from now on the proportion of pensioners is set to grow more quickly than those of working age.

A global dependency

The UK's dependency ratio is not set to rise quite so steeply as other global regions. The absolute number of 15- to 64-year-olds is not set to peak until around 2072, while it has likely already peaked in Western Europe and China. 

However, many of the most globally integrated emerging economies are ageing more rapidly than the UK or the US and the global dependency ratio reached a nadir in 2012.