Long-sought inflation may be finally spurred by global policymakers if they just wait.
Potentially spurring what many economists have said is the missing link: Wage growth, the post-World War II baby boom generation is getting ready to leave the workforce in droves across the globe.
Wages was squarely pointed out as a culprit for policymakers’ struggles to boost inflation to meet target levels by Maurice Obstfeld, economic counselor and director of research at the International Monetary Fund.
“In the U.S., and I think throughout the world, one of the big factors that seems to be a common factor weighing on inflation is the slow growth of wages. We don’t understand it very well,” he said.
“Without more wage pressure, it just becomes hard to get inflation going. And that’s what we’re seeing,” he added.
An early test case of whether an aging population can spur wage growth is set to be offered by Japan.
In Japan, labor force participation for those over age 70, has barely risen even while it has seen an increase by homemakers and the elderly since 2012, Nomura said.
Nomura said in a note this week that the boomers begin to turn 70 this year and hence it is a concern in Japan.
A large proportion of male respondents planned to work until they were 70m found a 2014 government survey of the elderly, Nomura added.
“We see a risk that, if there continues to be hardly any increase in the labor force participation rate of those aged 70 or over, the rate at which labor supply-demand is tightening may increase as many baby boomers leave the labor force when they turn 70,” it said. “We think the risk of an unexpected drop in the unemployment rate warrants some degree of caution.”
There were signs some service-sector companies were cutting business hours to avoid hiring more workers, Bank of Japan Deputy Governor Hiroshi Nakaso said in a speech to business leaders in Hiroshima on Wednesday, according to a Reuters report.
But the Tankan survey showed some service-sector companies were leaning toward raising prices to compensate for higher labor costs ahead and there was a limit to how far operating hours could be cut, Nakaso added.
despite the central bank launching a massive quantitative easing program in 2013, Japan has struggled to reach its 2 percent inflation target, and signs of price rises would likely be welcome news for policymakers in Japan.
According to a 2015 U.N. report on world population aging, with that figure expected to rise to 25 percent of the population by 2030, in Europe and North America, one in five people were age 60 or higher in 2015.
The report further said that one in six by 2030 would be the number of people who would be of age 60 or older globally, and the number in 2015 was one in eight people.
The report also said that the number of children aged 0-9 would be outnumbered by the number of people over the age of 60 globally by 2030.
But experts indicated it could finally resolve the world’s missing inflation while that may present problems for governments trying to support an elderly population.
A population’s age structure and trend inflation, or price increases over several years shared a common link, economists at the IMF said.
“The larger the proportion of young and old in the total population, the higher inflation,” the IMF economists said in a 2016 blog posting. “Put another way, when the working-age population is larger, the effect is disinflationary.”
(Adapted from CNBC)