Demography influencing inflation and interest rates

The fertility rate in industrialized countries dropped in the early 1970’s, while at the same time, life expectancy increased steadily. As a result, there are fewer working-age people to support the dependent consumer portion of the population, those under age 15 and over the age of 65.

This shift in balance between those who produce and those who consume will affect the level of inflation and interest rates.

 

Demography and Inflation

Baby boomers are quickly moving towards retirement while an even larger generation of millennials are entering the workforce. Since different cohorts behave differently with respect to savings and consumption decisions, we can expect demographic changes to influence inflation and the supply and demand balance of capital.

According to an IMF1 study that looked at 22 developed countries between 1955 and 2014, inflation manifests itself when a portion of the population consumes more than it produces, i.e., the younger and older populations outnumber the population in the labour market. This is what is happening now. There are fewer workers supplying the massive need for products and services of the other cohorts, putting upward pressure on prices.

Demographic changes explain almost a third of the variations in inflation and the bulk of the inflation trend.

 

Demography and Interest Rates

Over the last 20 years, boomers have found themselves in the midst of their wealth accumulation period, partly accounting for the downward trend in interest rates. As they enter retirement, they will gradually spend their savings to meet their growing consumption needs. In fact, health costs tend to grow rapidly as you get older, which explains the increased expenses in the latter years.

As a result, the period when the population aged 35 to 65 (savers) was at its lowest level, i.e., when few were saving, corresponds to the time when interest rates peaked. In contrast, when more people were saving, interest rates dropped, resulting in a surplus of available capital relative to ongoing investment projects.

Today, the cohort at the peak of their working life is small compared to the group whose consumption exceeds income. Baby boomers will reduce their savings at the same time as an even bigger generation will have to borrow to start a family, buy a house, furniture, a car and so on. These changes should favour creditors at the expense of borrowers who will see their cost of capital rise.

 

Related Posts

Changes to the GAINS Benefit Rate Tables

Benefit period: April 1, 2019 to June 30, 2019 The GAINS rate tables have been updated to provide a ready reference of OAS/GIS/GAINS payments at specified levels of private income, depending on a senior’s status e.g., single or couple. Guaranteed Income Supplement Single pensioners: $1,582.77 monthly ($18,993.24 annually) Qualified couples, per person: $1,225.22 monthly ($14,702.64 annually) Read all about GAINS […]

Cost Plus

Cost Plus coverage provides designated plan members and their dependents with additional benefits for expense items that aren’t covered and for items that exceed current coverage amounts identified in the benefits program. Under a Cost Plus program, a Cost Plus claim is an expense that is an eligible drug, dental or extended health claim under the Canadian […]

Registered Pension / Savings Plan

Individual contributions to Registered Retirement Savings Plans (RRSP) and Registered Pension Plans (RPP) are tax deductible and not taxed until the funds are withdrawn. For RRSP and RPP plans, there is a maximum amount for what you can deposit in a given year. Tax-Free Savings Accounts (TFSA) are a government-regulated tax-free savings plan. Similar to the RRSP […]

Group benefit taxation

Each benefit, depending on what your employer provides, plus the percentage you pay versus the percentage your employer pays – makes it a taxable or a non-taxable benefit. Taxable Income Premium is a tax deductible expense (Employer) Employer contributions?1 Benefit payments to employee Group Life yes Taxable Benefit Non-Taxable Dependent Life yes Taxable Benefit Non-Taxable Wage-Loss Replacement […]

Workers’ Compensation Maximum assemble earnings subject to premiums

Workers compensation (WCIB) is a percentage of earnings that you are required to pay out of your paycheck if you ever need to draw on it. Maximum assessable earnings subject to premiums. Taxable Income 2018 2019 British Columbia $82,700 $84,800 Alberta $98,700 $98,700 Saskatchewan $82,627 $88,314 Manitoba $127,000 $127,000 Ontario $90,300 $92,600 Quebec $74,000 $76,500 New Brunswick […]

Ontario Individual Health Premiums

Ontario residents pay the health premium through the income tax system. The money collected through the tax funds Ontario’s health services. Taxable Income 2005 and later tax years $0.00 – $20,000 no premium $20,001 – $25,000 (taxable income – $20,000) x 6% $25,000 – $36,000 $300 $36,001 – $38,500 $300 + (taxable income – $36,000) x 6% […]

Canada Pension Plan (CPP)

The CPP provides retirement benefits to people who have worked and contributed to the plan. The CPP supplements your retirement savings plan. Contributions towards CPP are deducted from the individual’s pay. This chart specifies annual contribution limits for individuals based on the Canada Revenue Agency (CRA) guidelines. Benefits – CPP 2018 Max. Amount 2019 Max. Amount Retirement […]

Student Tax Credit – Are you Eligible?

Student Tax Credit  The Canadian government offers two tax credits for businesses employing students. With these, small businesses like yours can claim 30% of eligible expenditures! Co-operative Education Tax Credit   Apprenticeship Training Tax Credit