The older a country’s population, the lower its inflation rate: Report

Ageing nations like low prices over high income may pose a challenge for central banks in the world’s industrial nations, according to Research from UBS.

The researchers plotted average inflation levels over the last five years against changes in the dependency ratio, which compares the very old and very young to the working-age population.Old+Knudsen+rich-man1

The resulting chart showed nations that have aged in recent years typically faced very low inflation and, in the case of Japan, deflation. By contrast, those that have been getting younger, such as India, Turkey and Brazil, have relatively strong price pressures.

As reported in this Bloomberg article, the finding clashes with the view of economics textbooks which tend to say a slowdown in population growth should put upward pressure on wages — and therefore inflation — as labour supply shrinks. Still, this ignores how demographics influence demand for durable goods and property.

A Federal Reserve Bank of St. Louis study that says because older generations work less and prefer higher rates of returns on their savings, they are averse to inflation eating away at their assets whereas the young initially don’t have many assets, wages are their main source of income. The young are therefore comfortable with relatively high wages and the resulting inflation.