World Economy

Old age may be the secret to finally awakening long-dormant inflation

Key Points
  • Retiring baby boomers may offer the missing link to creating wage growth and inflation
  • Nomura said a large number of Japan's baby boomers could retire in the next few years, potentially spurring hourly wage rises

Global policymakers may finally be able to spur long-sought inflation, if they just wait.

That's because across the globe, the post-World War II baby boom generation is getting ready to leave the workforce in droves, potentially spurring what many economists have said is the missing link: Wage growth.

New recruits listen to speeches during the welcome ceremony for new employees of All Nippon Airways Holdings (ANA) at ANA hanger on April 1, 2015 in Tokyo, Japan.
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Maurice Obstfeld, economic counselor and director of research at the International Monetary Fund, pointed squarely at wages as a culprit for policymakers' struggles to boost inflation to meet target levels.

"In the U.S., and I think throughout the world, one of the big factors that seems to be a common factor weighing on inflation is the slow growth of wages. We don't understand it very well," he told CNBC's "Capital Connection" on Monday.

"Without more wage pressure, it just becomes hard to get inflation going. And that's what we're seeing," he added.

Japan appeared set to offer an early test case of whether an aging population can spur wage growth.

Nomura said that while Japan has seen an increase in labor force participation by homemakers and the elderly since 2012, for those over age 70, it has barely risen.

That's a concern because in Japan, the boomers begin to turn 70 this year, Nomura said in a note this week. (In Japan, "baby boomers" are defined as those born between 1947 and 1949, and it's a group large enough to represent a clear spike in the population pyramid.)

Nomura added that a 2014 government survey of the elderly found a large proportion of male respondents planned to work until they were 70.

Japan is no longer in deflationary situation: BOJ’s Kuroda

"We see a risk that, if there continues to be hardly any increase in the labor force participation rate of those aged 70 or over, the rate at which labor supply-demand is tightening may increase as many baby boomers leave the labor force when they turn 70," it said. "We think the risk of an unexpected drop in the unemployment rate warrants some degree of caution."

Nomura estimated that the unemployment rate could be depressed by 0.9 percentage point in 2017-2019, adding that if the rate falls to 2.0 percent, it expected hourly wages could rise about 2.5 percent yearly.

In May, the jobless rate was 3.1 percent, seasonally adjusted, unexpectedly rising from April's 2.8 percent.

Nomura said the rise was likely a blip, as the June Tankan survey indicated businesses believed they were facing "stark" labor shortages.

Indeed, on Wednesday, Bank of Japan Deputy Governor Hiroshi Nakaso said in a speech to business leaders in Hiroshima that there were signs some service-sector companies were cutting business hours to avoid hiring more workers, according to a Reuters report.

But Nakaso added that there was a limit to how far operating hours could be cut and that the Tankan survey showed some service-sector companies were leaning toward raising prices to compensate for higher labor costs ahead.

Signs of price rises would likely be welcome news for policymakers as Japan has struggled to reach its 2 percent inflation target, despite the central bank launching a massive quantitative easing program in 2013.

At its meeting last week, the Bank of Japan said it expected inflation to be at 1.1 percent for the current fiscal year, down from its previous forecast of 1.4 percent.

Japan may be the canary in the coal mine for retiring baby boomers and their effect on inflation and wage growth, but many countries are likely to join it soon.

In Europe and North America, one in five people were age 60 or higher in 2015, with that figure expected to rise to 25 percent of the population by 2030, according to a 2015 U.N. report on world population aging.

Globally, one in eight people were age 60 or older in 2015, and that was expected to rise to one in six by 2030, the report said.

The BOJ's 2% inflation target

By 2030, the number of people over the age of 60 globally was expected to outnumber children aged 0-9, the report said.

But while that may present problems for governments trying to support an elderly population, experts indicated it could finally resolve the world's missing inflation.

Economists at the IMF said there was a link between trend inflation, or price increases over several years, and a population's age structure.

"The larger the proportion of young and old in the total population, the higher inflation," the IMF economists said in a 2016 blog posting. "Put another way, when the working-age population is larger, the effect is disinflationary."

The posting said the reasons why a population's age makeup affects inflation weren't entirely clear, but the relationship appeared "robust" and it pointed toward the ways various age groups consume and save differently.

"People tend to borrow when they are young (or their parents do it on their behalf), save during their working life, and live off accumulated assets when they are old," it said. "It follows that inflation pressure is high when the share of young and old people (who consume but largely do not produce) is large compared with the working-age population (which produces more than it consumes) and vice versa."

—CNBC's Yen Nee Lee contributed to this report.