Are Aging Demographics Inflationary or Deflationary?
As the #inflation debate rages on, it may be good to consider the long term impact of the #laborparticipationrate ("LPR"). LPR is the percentage of the population that is either working or actively looking for work and it is the lowest in 45 years. #demographics has been a key driver for LPR.
As the #inflation debate rages on, it may be good to consider the long term impact of the #laborparticipationrate (“LPR”). LPR is the percentage of the population that is either working or actively looking for work and it is the lowest in 45 years. #demographics has been a key driver for LPR; as more baby boomers and women entered the workforce, LPR started to rise and peaked in 2000 at 67.3% as the former started retiring. As it turned out, C19 was also a major accelerant for retirement (the “great resignation”) and LPR registered in 2020 the largest drop ever. While the drop was partially retraced, the trend seems to continue unabated for now as there are still approx 4 million people less in the workforce relative to 2019 (see chart for the US LPR).
A dwindling LPR is inflationary and even more so if demographics are driving the trend. Intuitively, a shrinking workforce drives salaries higher. Especially if immigration is restricted because of political populism. More importantly perhaps, an aging population is also inflationary as they need to ensure the constant flow of inflation-adjusted retirement income at the same time the tax base is being eroded by a higher dependency rate and longer life expectancy. Hence larger cohorts of aging voters will depend on (and vote for) political platforms that are fiscally expansive.
The combined effect of the decline of new young entrants into the workforce, a cutback in globalisation and opposition to immigration, is supportive of higher levels of inflation than what we have experienced over the last 25 years, especially in demographically challenged countries. A large stock of debt and fiscal deficits compound the problem as inflation erodes the purchasing power of retirees and sets up the stage for more populist politics and fiscal expansion.
Long-term investors need to tune out of the short term cycles and consider macro factors that are likely to underpin economic and financial trends for longer than the next 3-6 months. The three “Ds” of Deglobalization, Debt and Demographics, will be supportive for inflation at least until one or more of the three goes into reverse. An unlikely event at least for the foreseeable future. Disclosure: Hold all assets mentioned. Not investment advice. Do your own research.
