Inflation – It’s the demography, stupid!

It’s the economy, stupid! (It’s the economy, dumbass!) This line was coined by Bill Clinton’s whale strategist James Caville in 1992. It was originally aimed at his own campaign staff, along with two other mantras. You should focus on the essentials, back then the stumbling economy. However, it quickly became the election slogan and became a household phrase.

In a modified form, this saying also applies to combating inflation, specifically to the demographics factor. So, “It’s the demographics, Oida!” In the coming decades, this will be a major challenge for Austria and for the entire EU. The baby boomers will soon be retiring. Because the following years of birth were not as high, the proportion of the employable population falls, while the proportion of the non-employable increases. And spending on pensions will also increase sharply, as the “Wiener Zeitung” recently reported.

Demographics fuel inflation

And that also has an impact on inflation. The proportion of older people who demand goods and services but are no longer employed is increasing. According to Statistics Austria, the number of people over 65 in Austria will rise from just over 1.7 million at present to 2.6 million in 2050. However, the number of people between 20 and 65 living in Austria is expected to fall in the same period, namely from currently 5.5 million to under 5.2 million (see chart).

“This development undoubtedly has a positive effect on inflation,” explains Thomas Url from the Economic Research Institute (Wifo). He is co-author of the 2019 study commissioned by the Bertelsmann Foundation, “Macroeconomic Consequences of Aging and Labour-Saving Technological Advances”. According to the researchers, there could be additional inflation of “three percentage points” in Austria by 2050 due to long-term changes in the population structure, says Url.

Skilled labor shortages everywhere

Demography-related inflationary pressure is also expected to increase in the other EU countries. And the skills shortage. “We see a shortage across all sectors,” says Url. Less so among academics and unskilled workers, “classic skilled workers are in short supply.” In 1980 only 4.5 percent of people living in Austria had an academic degree, by 2020 it was already 19.5 percent. However, the proportion of those who have completed an apprenticeship has remained almost the same at 31 to 33 percent.

This deficiency is also reflected in the current wage negotiations. “Many apprenticeship positions cannot be filled at all,” says Url. This also increases the pressure on employers in wage negotiations to raise wages and apprenticeship salaries. As a result, real wages have also risen less sharply. In the meantime, however, these skilled workers are coming less and less because wages and salaries are rising in Central and Eastern Europe as a result of an even more rapid demographic shortage.

“Migration can be a solution for a shrinking population,” says Url, provided the qualifications are right. The decisive factors are what qualifications and what knowledge the people who come to us bring with them and how quickly they can find a job here. In order to alleviate the pressure on inflation, “we have to make full use of the labor supply,” says economist and EcoAustria director Monika Köppl-Turyna. She sees a lot of upward potential in female employment. While half of the women in Austria work part-time, the figure for men is only 11 percent.

In addition, Köppl-Turyna repeatedly advocates a higher actual retirement age. You have to keep people employed for as long as possible. “But an important element for longer employment is good preventive health care,” she says. Expenditure in the healthcare system should be directed more toward prevention.

More people in retirement and rising consumption with a simultaneously shrinking working population makes goods and services more expensive. The calculation isn’t quite that simple. Köppl-Turyna points out that the savings rate among older people does not necessarily fall because many save for retirement, for example for care or for their children and grandchildren.

Many price drivers

In addition, companies are responding to rising labor costs by investing more in technologies that save labour, i.e. with more automation. This can lead to inflationary pressures easing. But: If the investment and capital requirements in a society increase, interest rates also increase, says Köppl-Turyna.

In addition to demographics, there are a number of other inflationary effects that have not yet been priced in. For example, bringing the production of critical industrial goods back to Europe from low-wage countries will probably make these goods more expensive. The planned and necessary diversification of the supply chains is also having a price-driving effect.

In terms of price, it makes a difference whether you buy all the microchips in large quantities from the cheapest supplier on the world market. Whether you get them from five different sources, including additional costs for transport and logistics, says the scientist. “In any case, we have many factors that suggest that the ECB’s 2 percent inflation target will not be reached in the coming years,” says Url.

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