Key points
01
Many factors may be contributing to inflation, but one structural cause could be an aging population.
02
A byproduct of an aging population is a shrinking global workforce, which is ultimately inflationary.
03
Exposure to inflation-linked bonds, infrastructure and some commodities can help position portfolios.
Much has been made about how inflation—after being in a slumber for more than a decade—has come roaring back. Consumers have seen the prices of things like gasoline, produce, furniture and used cars spike higher, which erodes the value of wages and crimped spending power on a day-to-day basis.
Conversations globally have attributed the sudden resurgence of inflation on everything from a green-energy transition to pent-up demand and supply-chain issues. A deeper structural issue that can’t be ignored is an aging global population.
The world is getting older. According to 2020 United Nations data, the number of people aged 65 and older is projected to more than double between 2020 and 2050 and reach over 1.5 billion by 2050. That compares with about 727 million in 2020. The fastest growing demographic is actually those in their 80s and older.1
The world is getting older
United Nations, Department of Economic and Social Affairs. Data retrieved in February 2022.
Such a seismic demographic shift could bring about profound macroeconomic and investment implications.
From a macroeconomic perspective, the significance of an aging society for inflation is visible mainly through two channels.
Such trends will likely be associated with a drop in the labour force globally. This development would be the opposite from what we have seen in the last 30-40 years. In their 2020 book, The Great Demographic Reversal, Charles Goodhart and Manoj Pradhan describe a “demographic sweet spot” as one in which the labour force is growing.
But on the flipside, the reality of an aging population means the available pool of labour in advanced economies may be declining. A reduction in the share of workers can lead to labour shortages, which may raise the bargaining power of employees and lift wages—all of which is ultimately inflationary.
An aging population could further shrink the labor force
The World Bank, International Labour Organization. Data as of 21 March 2022.
While this has been largely known and observed by economists and demographers for some time, the more striking development in recent years has been that a similar pattern is emerging in some developing economies like China, with signs of worker populations there also shrinking. This is critical because it implies advanced economies may start to struggle to “import” labour from such places either via migration or sourcing goods.
The second significant effect of an aging society is a higher percentage of the workforce may be needed in the care sector. This happens to be a sector that is less likely to see efficiency improvements and the disinflationary effects from technology. Basically, it is easier to build an algorithm to automate clerical work than to build a robot than can take care of a human being.
Our central scenario for the medium-term is that on average inflation will likely remain higher than in the years post-financial crisis due to structural forces, like the deglobalization trend meant to secure supply chains, the move toward sustainability, as well as this aging population phenomena.
So with this more medium-term picture for inflation, it is key to ensure that investment portfolios are well positioned to reflect such a trend.
BlackRock’s Multi-Asset Strategies & Solutions group has put our views into practice by maintaining a structurally long position in inflation-linked bonds globally. For portfolios that allow investment in private assets, we see potential in investing in infrastructure assets with a contractual revenue link to inflation.
Commodities can also play a role as a hedge for inflation, although not all commodities are created equal. Our team’s proprietary research that was published last year and academic evidence indicate that energy has the strongest inflation-protection benefits, followed by industrial metals and finally agriculture and livestock.
There was so much debate early last year over whether inflation will be “sticky” or merely “transitory”. But signs persist that inflation could be part of the economic backdrop for some time, for reasons including the demographic transition I just discussed. Ultimately, this will continue to shape how the investment community thinks about portfolio positioning and construction.
