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What are the effects of an aging population?

Léon Cornelissen Demographics is a powerful trend. So how does an aging population affect economic inflation? Contrary to popular belief, aging is going to be inflationary.

Speed read:
  • Economists often believe that an aging population leads to deflation
  • This belief is based on the Japanese experience
  • But Japanese deflation was the result of specific circumstances
  • BIS study concludes that the effect is inflationary

The world is confronted by an aging population. This raises two questions for investors: how does it affect economic growth and how does it affect inflation? We interview Robeco’s Chief Economist Léon Cornelissen to find the answers. He believes the aging population will have a limited impact on economic growth. “We know that an aging population will have a downward effect. However, historically, the main driver for economic growth is productivity.”

Economists look at Japan
The effect of an aging population on inflation is more interesting, says Cornelissen. He believes that economists and the markets are too fixated on a single country to find answers: “Everyone looks to Japan.”

“The country is often seen as a harbinger, because it was the first that had to cope with the effects of a rapidly aging population. Japan has also been dogged by deflation for years. When you combine these facts, the temptation is to think that an aging population leads to deflation. But this assumption is too simplistic, and it is risky to draw firm conclusions from the experiences of a single country over a single period.”

But Japan is a bad example
The lack of inflation in Japan is probably related to very specific circumstances, says Cornelissen. “The Japanese had huge amounts of foreign assets. They sold these for their aging population and this repatriation of capital led to upward pressure on the yen, which made imports cheaper and kept a lid on inflation. But most countries in the world do not have the luxury of having huge foreign assets to finance an aging population.”

´It is risky to draw firm conclusions from the experiences of a single country´

And there are other country-specific reasons for deflation that have nothing to do with an aging population, he says. “Monetary policy was probably too tight and the Japanese didn’t put any effort into cleaning up the banking system.”

History provides answers
There haven’t been any other previous experiences of an aging population, but Cornelissen says that history can still provide answers. “An aging population is unchartered territory,” he says. “However, there have been periods where we have seen a relatively large dependent population. For example, the period right after the Second World War. A large part of the population was inactive – not because of an increase in the number of elderly people, but because of an increase in the number of births. The period was characterized by inflationary pressures.

A recent, very comprehensive study by the Bank for International Settlements (BIS) confirmed the link. It found that in the post-war period and across different countries, a larger share of dependents is correlated with a higher inflation. This conclusion makes sense, says Cornelissen. “The ’dependents’ consume more goods and services than they produce, exerting inflationary pressures through excess demand. Of course, monetary policy is another important factor in influencing inflation.”

The BIS report has been underestimated by the financial markets, he adds. “It has had some attention – for example in The Economist magazine – but most economists still focus on Japan. In the short term, the effects are small but in the long-term demographics will definitely have an impact on the markets.”
Léon Cornelissen

Léon Cornelissen

Chief Economist
"You can be sure of risk, you can’t be sure of return."
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Léon Cornelissen
Chief Economist


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