Thursday, September 07, 2017

Goldman: Demographics and Inflation

by Calculated Risk on 9/07/2017 11:17:00 AM

I've been writing about the possible impact of demographics on inflation. As an example, in Demographics, Unemployment Rate and Inflation, I noted that in a period with somewhat similar demographics as today, inflation didn't pick up until the unemployment rate fell below 4%.

However, Goldman Sachs economists think the demographic impact is minimal.  Here are a few excerpts from a research piece by Goldman Sachs economist David Mericle: Inflation and Demographics

The combination of low unemployment and low inflation has led many market participants to search for disinflationary structural forces that might be at work. Today’s note explores one often-cited explanation: demographics.

Demographic trends could influence inflation via their impact on growth, the dependency ratio, or inflation expectations. Other researchers have found that faster population growth is associated with higher inflation in cross-country studies; using US city data, we find a very small positive effect that arises only via the shelter component. Researchers have found mixed results on the effect of the dependency ratio, and we do not find a statistically significant effect.

Overall, our results imply a small and very gradual drag from demographics of about 0.05pp relative to the effect in 1980. While demographic effects via lower inflation expectations are intriguing and more difficult to test, any such effect would be very gradual and—with the expectations of all age groups still above 2%—not inconsistent with returning inflation to target.