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Column-Ageing ‘vortex’ could calm inflation excitement : Mike Dolan -Breaking

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© Reuters. FILE PHOTO : Wall Street is occupied by people, just outside of the New York Stock Exchange (NYSE), in New York City, U.S.A, on March 19, 2021. REUTERS/Brendan McDermid/File Photo

Mike Dolan

LONDON, (Reuters) – Fear of inflation reigns supreme and is a top-ranking factor in most 2022 investment forecasts into the year-end. But ageing populations and declining fertility rates may see it fall off the runway once more.

As headline and core inflation rates rise to their highest levels in years, squeezeing real incomes, there are debates about whether the world will return to the 1920s, 1970s, or 1920s. Strategists also model different scenarios, from “stagflation” to “growthflation”.

Inflation is the largest ‘tail threat’ according to Global Fund Manager Surveys, which continue to show that inflation has outpaced China’s stability, COVID-19 and asset bubbles.

This is also back in public consciousness – Google trends (NASDAQ:) show that there are more searches for “inflation” worldwide than any time in its 17-year-old history. It makes it sensitive politically for U.S. President Joe Biden.

Faced with this persistent trend for several months, the central banks have now quietly abandoned their mantra of a post-pandemic price spike being ‘transitory’. They are looking to quickly return to pre-COVID monetary settings.

Numerous mega-trend studies suggest that it is more than just base effect and bottlenecks when lockdowns lift. Others warn of ‘greenflation,’ which could see climate worries accelerate shifts to more sustainable energy. After a decade of political shocks caused by stagnant household incomes and voter unease, fairness has been pushed to the forefront of government agendas.

Additionally, there are concerns that the West’s fractious geopolitical tendencies and China and Russia’s on the other hand could lead to a reduction in global supply-chain trade. This has been instrumental in keeping goods prices low over the last 20 years. US long-term yield curve flattens, https://fingfx.thomsonreuters.com/gfx/mkt/byprjkyglpe/YC.PNG Google Trends chart on worldwide ‘inflation’ searches, https://fingfx.thomsonreuters.com/gfx/mkt/akpezmkbzvr/google.PNG

‘DEMOGRAPHIC VORTEX’

However, one trend is not cooling the talk of heat ahead: ageing populations and falling per-capita incomes. The pandemic was likely to have accelerated rather that reversed.

The U.S. has seen its birth rate decline steadily over the last decade. The current U.S. birth rate is 1.64/woman, which is far lower than the 2.1 replacement rates necessary to stabilize the population. This rate was not seen since 2007. Analysts at Washington’s Brookings say that the decline of women was more pronounced in 2020 than it was before the pandemic. This contradicts early forecasts for a lockdown baby boom.

Rapid ageing is due to declining births and longer lives is a global phenomenon. It is evident in Japan, Germany and Britain, but it was most apparent in China, where they had to abandon their one-child policy.

The Global Demographic Vortex” is a report from Eric Basmajian, a U.S. economist. It caught the attention of financial markets.

According to him, this ageing will “act like a vacuum sucking resources out of the prime-age workforce through taxation, debt-financed transfers and forcing central banks to either hold rates at the zero bound or rapidly return from another failed attempt to curb rising inflation.”

His main point was that the comparisons of today’s supply-side-driven inflation with that of 1970s is way off the mark, given the vastly different demographic background.

It was the post-World War Two Baby Boom that led to some of the best demographics in American history between 1960-1985.

Basmajian found that the U.S. 20-year rolling shift in the U.S.-age-dependency ratio, which is workers as a proportion of children and retirees, accounted for almost all long-term inflation trends during the last 50 years. EPB Macro Research chart on US demographics and inflation, https://fingfx.thomsonreuters.com/gfx/mkt/lbpgnbakovq/EPB.PNG

Albert Edwards of Societe Generale, OTC: strategist and long-standing market bearer who also spoke out against a “Ice Age” deflationary stance said these data show that demographics are poised to experience “maximum inflationary pressure” over the coming decade.

Charles Goodhart (economist) and Manoj Prhan (politicians), argue that the demographic trend could drive inflation through boosting wage bargaining power of workers and cutting savings.

Other people talk of a quick recovery following the pandemic. There are many government policies that support raising birth rates to stabilize the grim 2020 numbers.

However, Japan is the most advanced country in its ageing process and the evidence suggests a different outcome. In Japan, even with all of the current anxiety, inflation continues to be dormant.

Fathom Consulting analysts highlighted this week the link between Japan’s falling birth rate over the last 60 years, and the falling expectation of per capita economic development over the future decades. They suggested that the former caused the former to amplify a drop in overall output due to lower worker numbers.

They concluded that “it looks like the same effect could now be occurring in China,” which may potentially worsen China’s slowdown in growth over time.

2022 might be the year that proves to you whether or not you’re a believer. Bank of America (NYSE:) chart on its poll of fund managers’ biggest tail risks, https://fingfx.thomsonreuters.com/gfx/mkt/lgpdwnydnvo/BofA.PNG

(by Mike Dolan; Twitter (NYSE): @reutersMikeD Editing by Alexander Smith

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