The enduring link between demography and inflation

BIS Working Papers  |  No 722  | 
07 May 2018



Inflation puzzles academics and policymakers. Its lengthy cycles are hard to reconcile with conventional theories. Recently, several senior policymakers have suggested that population trends might explain these cycles. We study this potential link.


Our paper is the first to look at the potential link between the population's age structure and inflation, taking a very long-term view. Our data go back to 1870 and cover 22 countries. We find a strong relationship that potentially calls into question conventional monetary theories. The link could also have direct policy implications. It could raise the question of how persistent inflation really is. It could improve inflation forecasting. And it could explain how long-term inflation expectations remain well anchored in spite of low inflation at present.


We find a link between a population's age structure and inflation. A larger share of young and old in the population is associated with higher inflation. Conversely, a larger share of working age people is associated with lower inflation. The finding is statistically significant. It is present in different time periods, including the last few decades, and when different measurement methods are used. The finding is also economically significant. For instance, in the United States a high share of dependants in the population raised yearly inflation by around 7 percentage points between the 1950s and 1970s. And a higher share of working age people brought inflation back down, by around 7 percentage points, between the 1970s and the 2000s.



Demographic shifts, such as population ageing, have been suggested as possible explanations for the past decade's low inflation. We exploit cross-country variation in a long panel to identify age structure effects in inflation, controlling for standard monetary factors. A robust relationship emerges that accords with the lifecycle hypothesis. That is, inflationary pressure rises when the share of dependants increases and, conversely, subsides when the share of working age population increases. This relationship accounts for the bulk of trend inflation, for instance, about 7 percentage points of US disinflation since the 1980s. It predicts rising inflation over the coming decades.

JEL classification: E31, E52, J11

Keywords: demography, ageing, inflation, monetary policy