Demographic Shifts Boost Inflation as Age Groups' Spending Habits Come Under Scrutiny

The relationship between demographics and inflation is complex, but researchers have made significant progress in understanding its dynamics. According to a recent study by the Federal Reserve Bank of Atlanta, demographic changes can have both disinflationary and inflationary effects on trend inflation.

The study focuses on advanced economies and uses data from 22 countries over the period 1960-2024. The researchers find that the dependency ratio, which is a measure of the proportion of people aged 19 and less or 65 and older to those of working age, has a positive effect on inflation.

However, the study also reveals that changes in the structure of the age distribution can contribute to the dynamics of trend inflation. The researchers find that young age groups tend to consume more and exert upward pressure on inflation, while middle-aged individuals tend to save and reduce their spending. This 'bat-shaped' pattern is consistent across all 22 countries.

The study's findings have significant implications for monetary policy and asset valuations. As the population ages, the dependency ratio will increase, which could lead to higher inflation in some countries. However, the researchers also emphasize that demographic changes are just one factor influencing trend inflation and that other factors such as monetary and fiscal policy, commodity prices, and geopolitical shocks can amplify or dampen these effects.