Demographics “Killed” Inflation

Written by Richard Hokenson 

A recent Bloomberg story trotted out the usual suspects in explaining the persistence of low inflation in the United States, e.g. the globalized supply of labor, the impact of Amazon, etc. A point to emphasize, however is that the persistence of low inflation is not just an American phenomenon. Nor is it confined to developed economies, i.e. Japan and the Eurozone. It is a global phenomenon, affecting developing as well as developed economies.

We would never say that factors like the globalized labor supply had no impact on inflation. Our mantra for the past 25 years has echoed the sentiment of David Foot, the famous Canadian demographer, who stated that “demographics explains 70% of everything.” Other factors, e.g. the global labor supply, amplified the disinflationary trend but they did not create it. it was created by demographics. The die for secular disinflation was struck decades ago when total fertility rates for the world (see Chart 1) began to decline, starting with the more developed world (see Chart 2), and followed by the less developed world (see Chart 3).

15 years later, the rate of growth in the number of persons aged 15 years old in and over in the respective regions peaked. This was followed by a persistent deceleration with rates of growth continually decelerating (see Charts 4, 5 and 6). Since age 15 is generally regarded as the age when persons join the formal labor force and will soon make the transition from moving out of their parent’s home where they share goods and services and begin their own household life-cycle, the subsequent deceleration means ever slower growth in positive demand shocks. In the meantime, the ageing of the labor force means that supply curves shift out faster, creating the world of structural disinflation. This is also a sentiment recently made in a recent Economic Letter of the Federal Reserve Bank (2017) when they wrote “We find the overall impact of population ageing on U.S. interest rates has been negative and quantitatively relevant and is projected to be long-lasting.”

What Could Change?

The race to zero is the secular story. There has been and will always remain the possibility of a cyclical reversal in inflation and interest rates. A necessary condition for a cyclical uptick is a synchronized world business cycle. We are very aware that for the first time in nearly a decade, all 47 countries tracked by OECD are growing. We are perplexed that most persons were surprised by the strength in the Eurozone economies since it seemed clear that the Eurozone would take off once credit became available. But the recovery in the Eurozone began with a large amount of slack so it will be quite a while before alarm bells ring. A great deal of slack seems also to characterize many other countries as well. China’s growth has been erratic and has not set a path of faster growth. It is, of course, a situation that we will continue to monitor.


Carlos Carvalho, Andrea Ferrero, and Fernanda Nechio, “Demographic Transition and Low U.S. Interest Rates”, FRBSF Economic Letter 2017-27 (September 25). 

This update was researched and written by Richard Hokenson, as of September 29 2017