Population Aging Its Effect and Impact on Inflation
The recent study by United Nation World Population Prospects states that the population of elderly people aged 60 or older is expected to increase to 1 billion by 2020, and will further increase to 2 billion by 2050, representing around 22 of the worlds total population. The proportion of the oldest of elderly people (aged 80 and above) is expected to touch 4 by 2050 from its current 1. Figure 1 clearly explains this situation
This research paper takes into account a panel data of 66 middle and high income countries to analyze inflation effects of demographics. The data is available for only 66 middle and high income countries. The main objective of the research is to state that based on the amount of retired individuals in a country the consumer price change. The double log model used in this study also includes the interest rate and this paper uses data from 1991 to 2007 to demonstrate the most recent shift in the demographics. The result which shows the inflationary pressure that comes from young retires accolade the Modigliani life cycle hypothesis that this group consist of net consumers, while the working aged group people creates deflationary pressure and they justifies their position in the net saver category.
This research attempts to ask the question of whether Central Banks should be concerned about aging populations as it tries to implement its monetary policy. The wealth earned by the individual must be either spent of or inherited at death. Added to this there comes a situation when working is impossible, but the spending is still in case of necessary and this causes the old aged people to be the net consumers. These two realization states a conclusion that inflation should increase as the old age people share of population increase. This paper looks into this concern through an ordinary least square regression analysis for the 66 middle and high income countries. The regression evaluates the inflation, measured by the consumer prices over the period with the age groups in their populations. The objective of the research is to show that interest rates are correlated with the population amount that is made of net consumers and this group is individuals at more than 65. This study includes the analysis of interest rate and their affect on the inflations.
This analysis allows the researchers to find that aging population does not matter instead the interest rate fluctuations cause inflations. The analysis of this paper tries to point out theoretical background of the effects of demographic on inflation. The empirical model is sketched and the data analysis results are presented to state how age has affected inflation over the last twenty tears. Finally, implication of the research as it is much related to future monetary policy for the explored developed nations.
Table1 Old aged dependency Ratio Fig3 World Population by Age groups
200720252050World71016Industralized countries162126Developing Countries6915Europe162128North America121821Oceania101519Latin America Caribbean61019Asia61018Africa347Source C.Haub, 2007, World Population Datasheet and UN population Division
Population aging demographic projections reveal that the world is facing a historically unforeseen trend. The populations of the age groups of 60 years and 80 years compared with the total population are much higher than previous years and their growth is accelerating, as shown in Figure 3. The reason for the future increase in life expectancy is primarily due to improvements in medical technology. This shift has a two-fold effect. First the demand-side of the market is affected and this is because of the consumption behaviour changes that arise when an individual attains retirement age. Second, shift has the supply-side affect as retirement signs for productivity life end that starts when an individual decides to retire.
The Life-cycle hypothesis states that consumption and savings of an individual is need to be take over the lifetime and will influence the actions of the individuals (Modigliani Brumberg 1954). It is assumed that the age group of 45-64 gained experience and they are able to produce more with the same input amount. Therefore, increase in this age group should lead to increase in supply in an economy and this allows the economy to have the demand for goods at low level of price. And again the inflationary pressure faded away with the appearance of increase in working population. But when this age group moves to retirement their productivity affects and supply diminishes and this again increase the inflationary pressure. These two theoretical frameworks states that inflationary pressure will appear in the economy with a large number of non-working group. Here non-workers are those under the age of 24 and over 65 and it is must to specify that non-workers under 24 consumes less than the over 65 groups and this is mainly because of the lower cost for health care and the absence of the life savings. Thus inflationary pressures are higher from the age group of 65 and above.
Methodology
This paper uses the regression model, based off that of Lindh and Malmberg (2000), where the age structures are divided in categories which resemble the life cycle hypothesis consumption trend. These age structures are youth consumption (ages 0-14), consumption of young adult (ages 15-29), consumption of working age (ages 30-44), consumption of experienced workers (ages 45-64), consumption of young retirees (ages 65-74), and consumption of elderly (ages 75 and older). The use of double log model is able to smooth the trends of business cycle in inflations and helps in providing an exact result in estimation of the demographic changes on inflation. Added to this, inflation (InCPI) is measured by consumer price index in which the price for the year 2000 is the base value. The panel data presents observation of 1207 for 66 countries for the year 1991 to 2007. The regression model is
lnCPI 01lnCPIt-1 2IntRate 3Age1 4Age2 5Age3 6Age4 7Age5 8Age6
Where the (1-6) age variable natural log of the amount of population in that group, Age 1 ages of 0-14, Age 2- ages 15-29,Age 3- ages 30-44, Age4- ages 45-64, Age5-ages 65-74, Age6- ages 75 and above. lnCPIt-1 is a independent variable and it is lagged variable of the inflation and uses the natural log of the price index from the previous years. All the variables make use of log form of their respective values and exception of the interest rates (IntRate) as it vary largely according to the apparent business cycle of economy and therefore cause of inflation in the short period. In this way the model is estimated, the variable of short term which affects the inflation are completely represented in interest rates or it is eliminated in the natural log values of additional independent value. The exclusion of the age 1 from the model will help to strengthen this regression and the model appear as
lnCPI 01lnCPIt-1 2IntRate 4Age2 5Age3 6Age4 7Age5 8Age6
Data Analysis
The data attained for interest rate and consumer price index are from World Banks World development Indicator (WDI) and data is included from the period 1991 to 2007. The population data that is divided into corresponding categories is from U.S. Census Bureaus International Data Base (IDB).
Independent VariableExpected Sign lnCPIt-1PositiveIntRateNegativeAge group 2PositiveNegativeAge group 3PositiveNegativeAge group 4NegativeAge group 5Positive0PositiveIndependent VariableCoefficient -
(Standard Error) lnCPIt-1.8057
(.0059)IntRate-.0015
(.00018Age group 2-.0160
(.0241)Age group 3-.0432
(.0389)Age group 4-.0041
(.0470)Age group 5-.1020
(.0255)0.4206
(.0263)Adjusted R-squared .9580, and denote significance
at the 1, 5 and 10 level respectivelyTable-2 Expected Sign Table-3 Regression result
The expected sign from the regression is shown in table 2, but it should be highlighted as their estimates are given. lnCPIt-1 expected to give positive sign because the rise in price from the consumer goods in a year takes over to raise the price of the consumer goods in following years. In order to fight with the inflation central banks will make use of their power over monetary policy and they try to uphold the consumer prices. At their disposal one tool is interest rate, which banks raise to increase the level of saving than the consumption. Thus, it the inflation rate will fall with the raise of interest rate and providing a sign of negative for the interest rate coefficient. The shift in demographic have been shown to affect the rate of inflation with respect to individuals consumption pattern. This study is specifically concerned with the trend of inflationary thats expected from the retirees. Hence, it is expected that working age group (age4) do have negative relationship with the inflation, wherein retired age group (age5age6) will have positive relationship.
The results of this study are provided in Table 3. This study able to state that country and time specific variables has a very little effect on the inflation and instead the composition of demographic within a country affects the inflations. The expected sign are found for both the lagged inflation variables and interest rate variables and provide further proof to their contribution to the level of inflation in a nation. Young retiree variables expected sign also found and it states that these groups are considered as net consumers after their retirement. The elderly populations coefficient value founds to be negative, this somewhat unexpected sign. Consumption is low from this group and they create the deflationary pressure in the economy. The reduction in their funds subsequently causes this age group above 75 to cut their consumption level to maintain their financial ability. Added to this elderly people are not able take care of themselves which resulting in high pay to the health care providers. This indicates that basket of goods used for CPI would not represent the age group over 75 years. The middle aged population coefficient seems to be ambiguous and shows no effects on the inflation. Some individual in this group earn high income and save highly while some earn high income and spend more and the same will be in case for low income. Therefore, the net affects all these variables seem to be insignificant to inflation. Still, the regression model states that 95 of data measured by the adjusted R-squared value, states that computation of inflation may largely affected by the effects of demography and government monetary policy.
Conclusion
The research states that the monetary policy, which is measured by the interest rate, shows the noteworthy impact of inflation on the economy. Many Central Banks have attempted to implement policies to target this inflation. However, it is clear that inflation rates are upset by demographic changes when the population reaches the age of retirement. Consumption patterns will start to change with the improvement in health of the elderly population and will enable them to have an active lifestyle. For example, the age group of 75 years and older is contributing to deflation in the economy, but with improvements in medicine and the advent of medical technologies, the effects of this group can be shifted to those in the age group of 80 years and older.
Central Banks must be aware and cautious about the changing trends in demographics as they are related to inflation they should be wary of these changes as they instate their inflation targeting policies. It has already been stated that the working age group brings the deflationary pressure due to their increased saving for retirement. However, their effects on the inflation are insignificant. Rather, inflation is due to the inefficiency in the economy because these aged populations are more interested in spending than in saving. This mindset could be due to the governments social programs like U.S. Social Security and Medicare. These programs act as the supplemental benefit and income for the retired. Therefore, the retired populations are able to depend on taxpayers rather than saving for themselves. In addition, the question arises of how much Social Security actually contributes to inflation. Though the objective of our research is not to analyze this question, it relates directly to the policy decisions that stem from this paper and should be considered by the policy makers.