Where are we headed?
Longer term prospects of inflation
“Economic forecasting is like driving a car blindfolded and getting instruction from a person looking out the rear window.”
“Three economists went target shooting. The first missed by a metre to the right, the second missed by a metre to the left and the third exclaimed “we got it”.
“An economist will know tomorrow why the things she or he predicted yesterday didn’t happen.”
The list goes on, there are tons of jokes made about economists and economic forecasting. But that does not stop them. Inflation is a red hot topic, and yet again, economists are making forecasts. Forecasts not just about inflation tomorrow or the day after but as much as decades from now. Arguments lie on both sides of the bell curve. Here are a few themes that could play out in favour of the return of inflation as the 1970s peeps would know of it.
Demographic Transition - Population is ageing across the world. The share of senior citizens in the population is expected to rapidly become a formidable chunk. Consequently, as analyzed in Goodhart and Pradhan’s “The Great Demographic Reversal”, the dependency ratio will worsen as the share of dependants to the members of the workforce would increase. Now, more dependants and less workers means higher consumption but lesser output. Tell this to a high school economics student and he’ll tell you yeah, that sounds like inflation.
Moreover, the ageing population paves way for a labour shortage. The real wages would rise as the bargaining power of labour increases.
Research by IMF’s economists establishes the link between age structures. They maintain, “The effects of various age cohorts follow a U-shaped pattern: the young (ages 5 to 29) and the old (ages 65 to 79) are inflationary, whereas the prime-working-age cohorts are disinflationary.” The elderly would spend more than he invests. And as an increasing share of savings is devoted to consumption and not investments, this population of elderly people is bound to facilitate an increase in rates. The global savings glut dries up.
Bringing it back home - One of the greatest pillars of the deflationary tendencies from the past decade has been globalization. Global economic integration increases competitiveness, reduces costs, and promises correction of any anomalies. However, of late, geopolitical tensions and the mighty pandemic have created a tilt toward regionalization. Supply chain disruptions and bottlenecks caused by cross-border economic activity have hurt nations and businesses. Everyone wants to bring production back home. And as this wave of regionalization is welcomed, it would bring higher costs and fragmented labour markets (read: higher wages).
Going Green - Any and everything you talk about today, somehow finds its way into the environmental debate. As the green agenda picks up, price pressure would increase. Countries are considering carbon taxes, increasing tariffs on fossil fuels, and hiking energy prices. These tax hikes are implemented in stages, resulting in a continual cycle of price increases. Inflation would pick up as the economy shifts from inexpensive fossil fuels to more expensive clean alternatives.
I started off with jokes. Here’s another one.
“For every economist, there exists an equal and opposite economist.”
Quite obviously, there are some facets of this economic transition that could act as counterarguments to high inflation.
Dwindling Innovation - As The Economist puts it in one its pieces, “a shrinking planetary population might seem like a wholly welcome thing given the world’s environmental challenges. But fewer people may also mean fewer new ideas, yielding a very different sort of future than optimists tend to imagine. In the absence of new ideas, growth must eventually grind to a halt.”
One could argue that increased spending on education and welfare could offset such a fall in technological growth. Phew, we do not live in the 20th century anymore. Such expenses are subject to diminishing marginal returns.
In a nutshell, as technological progress slows, eventually, growth rates tend to follow suit.
The India Story - With a young population, growing global dissonance against investment in China, and a macroeconomic impetus for growth, India is bound to benefit economically. The supply from China was relinquishing global demand in the last decade. As production in India picks up, prices should remain in check. India’s non-alignment stance keeps any geopolitical tensions at bay and welcomes trade. Sure, India’s fertility rate is falling. It has fallen below 2.1 children per woman (2.1 is the replacement rate required for a steady population). India’s population is aging, but going to the same IMF economists, a 35-year-old population contributes less to inflation than a 25-year-old one (context - current average age in India is around 26)
Only time will tell. But what do you think? Where are we headed?
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