Central bankers scratching their heads as to why inflation has stayed so low despite unprecedented loose monetary policy may have a new scapegoat: old people.
Research published today by Oxford Economics, a consultancy, shows a clear correlation between an ageing population and lower inflation. In the five years to 2015 47 per cent of the variation in inflation rates can be explained by the proportion of elderly in the population, the research shows.
Older people might favour lower inflation because they tend to have a higher pile of savings, the real value of which is eroded if prices rise. Older people (including most of the policymakers themselves) may therefore tend to favour political regimes which are minded to target lower inflation.
The negative correlation between inflation and the share of over-65s in the population has existed in 50 of the last 60 years, with the ‘80s the only decade when it broke down.
Gabriel Sterne, Oxford Economics’ head of global macro research and an author of the research, told City A.M. the findings give further weight to calls to change central banks’ inflation targets.
The major central banks around the world all have similar mandates targeting two per cent annual inflation, but most have struggled to push inflation up to anywhere near that rate. UK inflation remained below two per cent during the whole of 2014, 2015 and 2016, only crossing the target last year after the devaluation of sterling added a big external push in an otherwise stagnant inflationary environment.
Part of the reason central banks have struggled is that monetary policy becomes less effective as interest rates approach zero, forcing central banks to opt for unorthodox measures such as quantitative easing.
“Two per cent inflation targets mean you hit the zero bound too often,” said Sterne. “It’s too sensitive for our society.”
Sterne favours raising the target to around three to 3.5 per cent, giving more room for error before damaging deflation begins.
The idea of raising inflation targets has been gaining traction in recent years, with prominent backing from the International Monetary Fund’s former chief economist, Olivier Blanchard. The top economist at the Bank for International Settlements, Claudio Borio, last September said central banks may need to show a “greater tolerance for deviations of inflation from point targets”.
However, central banks themselves have dismissed any suggestions of changing the inflation targets outright to avoid uncertainty around monetary policy. A Bank of England blog post about the ageing population did not mention inflation once, despite talking of “far-reaching macroeconomic implications”.