The higher life expectancy and the lower average birth rate registered globally over the past 70 years form a distinctive trend of rapid population ageing worldwide. This problem is aggravated in Russia due to the decline in the total population.
Demographic changes significantly influence the development of individual economies as well as the global economy in terms of labour resources, consumer demand, the composition of social spending, and the prospects for long-term growth. The consequences of population ageing may affect a number of aspects (link in Russian), including inflation processes. However, opinions are still divided (link in Russian) as to whether population ageing has a proinflationary or deflationary effect.
In our recent work, we have tried to contribute to the exploration of this issue and determine how the age structure of the population impacts inflation, through the example of 79 Russian regions. Unlike most of previous studies, this work uses regional data (collected from Russian constituent territories) rather than countrywide statistics. Due to regional differences, including the demographic ones, this approach helps in better understanding and identifying individual interrelations which countrywide data may fail to demonstrate.
We conclude that the older generations have a proinflationary effect, while the effect of the younger generations is deflationary. No definite conclusions can be drawn as to the working age cohort. Are these conclusions counter-intuitive or in line with economic logic?
No universal theory exists
Demographic changes affect both supply and demand. In theory, at each point in time, only the working age population can meet all consumers’ demand for goods and services by producing them. The representatives of the other age groups (above and below the working age) are net consumers.
A number of experts believe that this fact alone is evidence that they are persistently proinflationary. All else being equal, the larger the share of the younger and older population, the higher the price growth, since demand is created by all age groups, while supply is generated only by the working age group and a relative reduction in its proportion will result in demand exceeding supply.
Such a U-shaped dependence is demonstrated in a number of empirical works. In particular, over a fairly long period (from 1870 to 2016) for a sample comprising 22 advanced economies, it has been identified that the inflationary pressure eases when the share of the working age population grows.
This approach is consistent with what is called the ‘life cycle theory’, whereby working age people are inclined to make savings but willingly spend them after retiring. Furthermore, as regards developed countries, elderly people demonstrate a higher propensity to consume. Therefore, population ageing, i.e. an increase in the share of elderly people, has a proinflationary effect.
However, empirical studies for developing countries, including former members of the USSR, show somewhat opposite results: working age population produces a proinflationary effect, while the elderly have a deflationary effect.
This results from the low savings and pension levels as well as the great importance of traditional and survival values for the older generation. Unlike in the developed countries, the elderly are usually at the bottom of the income distribution in developing countries. They do not spend savings and consume less, usually receiving most services from within their households, and thus produce a deflationary effect. Tighter family bonds, where adult children who have their own families live with their parents relying on them for childcare, may also reduce consumption by the younger cohorts (e.g. services for children and children’s goods which are passed on from older children to younger ones). In other words, the life cycle theory in its classical form does not work. Population ageing reduces aggregate demand and decelerates inflation.
At first sight, these discrepancies in the impact of age groups on inflation may arise from differences in the data, as samples collected in both developed and developing countries are used. However, practice does not always confirm this assumption.
For example, regional data from Japan and the US suggest that there is a negative correlation between inflation and the ageing rate: both Japanese prefectures and US states record lower inflation amid population ageing. A 2021 study based on Russian data determines that an elderly population is proinflationary (though the effect is less pronounced than that of labour, which is also at variance with the life cycle theory).
The reasons behind these discrepancies may be more deeply rooted, extending beyond the peculiarities of economies, and stem from the simultaneous impact of several opposite mechanisms whose effects overlap.
Thus, a study using data from Japan identifies a dual effect of population ageing on inflation. On the one hand, population ageing resulting from increased average longevity has a certain political effect. A high voter turnout rate is supported specifically by the elderly, and the government charges other population groups relatively higher taxes to meet the needs of such voters. This in turn eases the inflationary pressure, which could affect the real savings of the elderly. On the other hand, population ageing associated with lower birth rates and a larger relative share of the older population speeds up inflation. This results from a rise in budget expenditures to support this population group, among other things, amid the contracting tax base.
In this context, our conclusion that Russian labour does not have any consistently significant effect on inflation is logical. The increase in the relative share of the working age population may result from a decline in the proportion of other groups that have offsetting inflation effects.
It is critical to identify the reasons behind the results obtained. For example, the proinflationary effect of the elderly and the deflationary impact of the younger generation may be associated with the differing inflation expectations of these population groups. Besides the fact that social and demographic characteristics are the main reason behind the differences in the inflation expectations of different people, the younger cohorts in Russia have the lowest (link in Russian) inflation expectations. Younger people did not experience the high inflation of the 1990s and the crises of the early 2000s, and their assessments of the current and future inflation are therefore optimistic and not overstated. Contrastingly, these events are still fresh in the memories of the older generations.
Furthermore, in the general context, it is worth emphasising the idea that traditional family values are important in a number of countries. It is possible that, due to Russia’s cultural peculiarities, the older generation typically supports younger people (children, grandchildren and even great-grandchildren) directly, including financially, and several generations living together is not an exception at all. This may entail mixed inflation effects. For example, the older generation may spend resources on young people, which makes it more difficult to identity the end consumer. Moreover, flats, country houses, and other property that is handed down from the older generation to the younger generation may reduce the consumer activity of the younger cohorts in the long term. Nevertheless, these are merely hypotheses that profoundly need further in-depth exploration.
