Demographics and inflation – an age-old problem

Slower population growth has probably depressed OECD inflation by around ½% over the past decade. Going forward, the outlook could change.

Demand or Supply?

The relationship between demographics and inflation is a contested issue because there are two schools of thoughts: one focusing on demand, the other on supply.

The first ‘Malthusian’ view sees a positive link between populations and prices via higher demand. More people means more demand for scarce resources and therefore higher prices.

The second ‘dependency ratio’ theory looks at the distribution of the population. Workers are seen as deflationary as they ‘supply’ labour while dependents (children and elderly) are inflationary as they consume goods and services but do not produce anything.

Demand - Malthus

Back in 1798, Thomas Malthus wrote about the link between demographics and inflation (“An Essay on the Principle of Population”). He believed that rising populations boosted food prices through higher demand. He believed this would constrain future population growth as rising living costs would increase poverty and ill health.

Data show the existence of a strong positive relationship between UK population and prices in the 200 years prior to Malthus’ essay. Ironically, the relationship broke down immediately thereafter. Prices stabilised in the 1800s while population surged as the industrial revolution boosted productivity.

So the population/demand channel is clearly an important factor driving inflation, but not the only one.