MONEY & LIFE

Inflation Threat: Aging Economies With Falling Birth Rates

By: Anneken Tappe · July 01, 2024 · Reading Time: 2 minutes

Baby Bust

Falling birth rates are beget aging populations: Without enough young people, the average age goes up. And this is a growing concern for economists because it could mean higher inflation is here to stay.

Falling Fertility

Aging populations could slow economic growth and stoke inflation, according to a new study from the Organisation for Economic Co-operation and Development (OECD).

The total fertility rate of the 38 surveyed OECD countries has steadily declined for decades. It fell from an average of 3.3 children per woman in 1960 to just 1.5 children in 2022, dipping below the level of around 2.1 children necessary to maintain current population levels. Some countries, including Italy and Spain. In Korea, the total fertility rate has dropped to 0.7 children per woman in 2023.

An aging population means that the workforce is shrinking as more people retire as they age. This is what the data say: In the 1960s, there was a ratio of six working-age adults for every retired person, but that figure is projected to reach 2:1 by 2035, according to the World Economic Forum . For governments, this means increased spending on social programs for older populations. At the same time, fewer working-age adults could create labor shortages that drive up wages, and by extension inflation.

Trend Investments

Countries concerned about falling fertility rates should focus on promoting gender equality and reducing childcare costs, said Stefano Scarpetta, the OECD’s Director for Employment, Labor, and Social Affairs, as reported by
CNN
. Immigration also plays a role in boosting the working-age population.

Major demographic change can give rise to new industries, companies, and products. Aging populations are thought to be a structural tailwind for industries, such as health care or elderly care, for example.

If persistently higher inflation is in our future, it could also change the way central banks devise their policies, and the way investors put their money to work. The Federal Reserve has an inflation target of around 2%. The Fed’s preferred inflation measure has been above that level since 2021.

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