We have not had a double-digit annual increase in the consumer price index since 1981. Serious inflation is not in the historical memory of most Americans.
But this settting could change.
One plausible scenario for a big change in America’s economic climate — as well as those in other rich economies — is laid out in the 2020 book The Great Demographic Reversal: Aging Societies, Waning Inequality, and an Inflation Revival. Economists Charles Goodhart and Manoj Pradhan make the case that the current macroeconomic situation of persistently low interest rates and low inflation was created by a particular set of historical economic circumstances. Demographics and globalization are key here. The late 20th century saw a flood of workers into labor markets across the world thanks to the baby boomers, as well as the addition of workers from China and Eastern Europe once the Soviet Union dissolved. This labor-supply shock, according to Goodhart and Pradhan, had the tendency to push down inflation — particularly as seen in wage growth — and interest rates. And thus create a world where it’s been easy for government and business to borrow.
But now those demographic and globalization shocks are reversing. Working-age populations are peaking or even shrinking around the world. And rising worker wages in China means sending jobs there isn’t the bargain for Western companies that it used to be. As a result, Goodhart and Pradhan conclude, bargaining power will shift back to domestic workers and away from employers, pushing up wage inflation. And at the same time the number of old people, who consume rather than produce, will continue to increase. That means more demand for goods and services — and, again, more inflation. “The great demographic reversal and the retreat from globalization will bring back stronger inflationary pressures — this is our highest conviction view,” Goodhart and Pradhan wrote in a 2020 essay.
So a world of higher inflation, higher interest rates, and greater fiscal challenges for Washington — a world few policymakers seem to be considering or even imagining as possible. Yet the pandemic and the tsunami of money being spent to fight it should encourage Washington to think harder about just such a possibility.