Inside Economics: Can our ageing population kill inflation? Is it the end for Honey Puffs and cash?
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Will future trends spell the death of inflation?
“I always follow your columns... your comments at the very end of one of your recent articles regarding ‘deflation’ tweaked my interest. What connection is there to AI and an ageing NZ population and deflation?” - Ron Melville
I’ve always tended to take an optimistic view of the future. Perhaps this is an example of that.
But essentially what I’ve alluded to in my previous columns is the argument that big trends in demographics and technology will put a lot of structural deflationary pressure on pricing.
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“Inflation is always and everywhere a monetary phenomenon,” economist Milton Friedman famously said.
He’s not wrong and I’m not arguing that big spending by the Government and loose monetary policy will ever stop causing inflation.
But, to put it bluntly, older people save more money and spend less than younger people. So as the population mix skews older, that trend becomes a natural restriction on the money supply in an economy.
There’s no doubt the world’s population is ageing. The Financial Times reports on a study by the Institute for Health Metrics and Evaluation which looked at 304 countries and territories. It found that 76 per cent will dip below population replacement rates by 2050 - a number that will rise to 97 per cent by 2100.
Generally, there is a correlation between women’s education and lower birth rates. Declines are also most pronounced in wealthier nations.
In 2023, New Zealand experienced its lowest natural increase in population since World War II with 19,071 more births than deaths - in 1943, there were just 17,562 more births than deaths.
Sociologist Paul Spoonley has made the point that by the end of this decade, almost a quarter of all people in New Zealand will be aged over 65.
Economists are divided on the impact of our ageing population. Some argue that older populations will mean fewer workers, causing labour shortages and putting inflationary upward price pressure on wages.
I don’t buy it. Places like New Zealand - and most other OECD nations - will continue to have access to a global pool of migrant labour to fill shortfalls.
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And even in countries that don’t like immigration - ie Japan - the ageing population has clearly had a deflationary impact.
Population Ageing and Inflation, a 2019 study by the University of Warsaw’s Paulina Broniatowska published in the Journal of Population Ageing, looked at 32 OECD member economies over the period from 1971 to 2015. It concluded that a “larger old-age dependency ratio is indeed correlated with lower inflation. Therefore, ongoing population ageing may exert downward pressure on inflation”.
It makes sense. In the decade before the pandemic, the world battled deflation as a serious economic concern. When we all went into lockdown, central banks kept economies functioning by loosening the money supply. It worked but also came with excessive inflation - a reminder that Friedman’s fundamental rule still holds.
When the monetary supply balance is restored - which we expect it to be by the end of this year - there is every reason to expect that central banks will again be fighting big structural deflationary forces.
Ironically, even after all this post-pandemic global inflation, Japan has only now lifted its official cash rate out of negative territory. Last month the Bank of Japan raised interest rates for the first time since 2007, becoming the world’s last central bank to end negative rates as the country puts decades of deflation behind it.
The Financial Times described it as “the end to one of the most contentious economic experiments of recent times”. My pick is that this isn’t the last the world has seen of negative interest rates.
What about the robot workers?
I’m hopeful Artificial Intelligence (AI) won’t create mass unemployment. From the steam engine to the computer, fears about machines replacing humans have generally been unfounded. There has been disruption and periods of upheaval with some jobs becoming obsolete. We might feel that in the next few years.
But on balance, more jobs are created and here we are in this high-tech age with some of the lowest unemployment figures in modern history.
AI might represent a big step change but we might well need that as the labour market grapples with the retirement of the Baby Boom generation.
Meanwhile, once we get over the novelty value of using AI to mimic human creativity, there are a lot of boring back-end jobs it can do to make the world more efficient, boost productivity and bring down costs.
In February I was wowed by Spark NZ’s AI open day - which didn’t feature robot dogs or talking video avatars. There were simple practical AI applications like smart cameras that could be mounted to cars to inspect roads for potholes. A road assessment that took 66 days to complete now takes just seven days. Road assessors can cover 300km a day, compared to the 15km a day achievable using the traditional approach. The AI analysis also improved the macro-data, which can build a more accurate picture of which regions need the most attention. That might mean more engineers available to actually fix the roads and build new ones.
Chart of the Week
Dollar dives
March was a rough month for the Kiwi against the Greenback, which won’t help Orr in the inflation fight. A lower value dollar means more expensive imports - and more money in local currency for exporters.
BNZ senior markets strategist Jason Wong described the Kiwi as underperforming and oversold in his latest note. Commodity prices went New Zealand’s way in March, usually a reason for a buoyant dollar. Perhaps it was recession news. Despite feeling it might be due to come back a bit short-term, Wong noted that BNZ remains bearish on the Kiwi for the rest of the year - mostly based on New Zealand’s poor economic performance relative to Australia.