Developed economies face a world of permanently high interest rates because aging populations will in future create “persistent supply constraints” that keep inflation elevated, according to the Blackrock Investment Institute.
Changing demographics mean the number of pensioners in countries like the UK and the US will grow while the working-age population shrinks. The shift in balance between demand and supply will leave workers struggling to match the spending needs of the older population.
“Aging populations mean an ever-rising share of the population is past retirement age, resulting in worker shortages,” Blackrock wrote. As a result, developed markets could “no longer produce as much without sparking higher inflation” as staff are able to bargain for higher pay.
“Central banks have a harder job in the new regime. They don’t have the tools to resolve supply constraints.”
The warning that advanced economies may be moving into a period of permanently higher inflation comes as central banks desperately try to curb rampant price growth.
Speaking at the European Central Bank Forum on Central Banking in Sintra, Portugal, on Wednesday, Bank of England Governor Andrew Bailey suggested rates may need to stay high for longer as price growth remains stubborn.
“I’ve always been interested that the market thinks the peak will be short-lived in a world where we’re dealing with more persistent inflation,” he said.
Blackrock Investment Institute’s deputy head is Alex Brazier, the former BOE executive director for financial stability. The paper he jointly authored said: “The shrinking supply of workers in several major economies due to aging means a low unemployment rate is no longer a sign of the cyclical health of the economy.”
“Broad worker shortages could create incentives for companies to hold onto workers, even if sales decline, for fear of not being able to hire them back. This poses the unusual possibility of ‘full employment recessions’ in the US and Europe.”
“Aging could also prove inflationary, in our view. We don’t think older populations consume less, rather the mix of demand changes.”
This article was provided by Bloomberg News.