15 July 2023
With this week’s US CPI reading showing that headline inflation continues to fall, the question remains: what is the long-term outlook for inflation?
Four broad drivers seem set to drive the inflation outlook over the next decade. On the inflationary side: deglobalization and reshoring of supply chains to suit a multipolar world, as well as potentially tight commodity markets driven by underinvestment in capex and increased demand to deliver the green energy transition. On the deflationary side, technological innovation is driven by advances in AI and machine learning as well as demographic trends.
As populations age and population growth slows, demographics are set to have a large impact on economic and market outcomes. Historically, there seems to be evidence that the growth in the working-age population has been correlated with inflation levels. Below, we show the rolling 10-year change in US CPI against the rolling 10-year change in the civilian labour force, lagged by 3 years.
Source: U.S. Bureau of Labor Statistics
The historic data seems to correlate quite well, but it is difficult to tell if this is illustrating a causal or merely coincidental relationship, although there is a plausible economic rationale for the relationship: when the working-age population grows quickly, so does consumption, and this demand spurs inflationary pressures.
One really nice thing about demographic data is that it is reasonably easy to forecast, and so using the U.S. Bureau of Labor Statistics forecasts, we roll the 10-year change in the civilian labour force forward to 2028.
This suggests that the demographic pressure on inflation will remain low, and at least based on this factor, a return to 1970s levels of inflation is less likely than a return to a low inflation regime over the next 10 years.
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