DEMOGRAPHICS AND INFLATION / THE FINANCIAL TIMES LEX ( HIGHLY RECOMMENDED READING )

Demographics and inflation

Last updated: September 29 2010 22:16

History may not be bunk, as Henry Ford claimed it was, but most predictions certainly are. The future, after all, is a closed book. But demographic forecasts are a bit more reliable. After all, most of the people who will be alive a few decades from now are already here, and birth and death rates change more slowly than technology, taste or politics. That suggests an alluring possibility – forecasters could do better if they relied more on big people-measures.

Population trends do matter. The steady decline in Japanese working age population – 5 per cent smaller now than in 1990 – makes the country’s decades-long growth slowdown look less dramatic. Japanese fecundity started shrinking early, but it is safe to predict that barring a big rise in immigration most developed countries will slide into similarly slower growth as smaller families cut down the number of workers and consumers.


Demographic trends might also shape finance. A Deutsche Bank report suggests two ways they might. First, the declining rate of population growth will reduce resource demand, pushing inflation rates downward. That may happen, but, as Deutsche admits, other factors, for example monetary policy and growth rates, matter more.


The second prediction is that the decreasing share of the population in the prime 35-54 investing age group will be a drag on the prices of all sorts of assets. In developed countries that cohort is set to shrink by 14 per cent in the next 40 years. In the less developed world, there will be a 36 per cent increase, but that is well down from the 183 per cent jump over the last four decades.


Again, even if the shifting age profile does change the balance of buyers and sellers, it is only one factor out of many – and any demographic drag may be delayed by later retirements.


Still, the basic idea makes sense. The greying – and in many countries the shrinking – of populations is likely to be bad for risk-taking, growth, and investors.

Copyright The Financial Times Limited 2010.