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Baby Boomers Reaching Retirement Will Make Inflation Tough To Tame

Daniel Plainview

Updated: November 30, 2022

us economy 2023
Editor’s Note:

EDITOR'S NOTE: You probably remember how the Federal Reserve was closely watching the labor market as a potential signal for hiking interest rates. The labor market was tight, especially after the Great Resignation which left companies in a desperate position to raise wages in order to attract workers. The Fed was keeping an eye on rising wages, concerned about a wage-inflation spiral. As more Boomers leave the workforce to retire, many of the jobs left behind aren’t being filled fast enough. The result: supply and production are slowing while consumer demand remains high. Although many Boomers fear that their retirement savings may be eroded by inflation, their retirement directly plays into the inflation they’re hoping to mitigate.

The baby boomers are hitting their retirement years, and that may make it more challenging — and economically costly — to lower inflation.

  • Demand in the economy exceeds supply of goods and services. The fewer people who are working because they have elected to retire, the harder it will be for supply to catch up.

Why it matters: With retirements driving slow labor force growth, more of the burden of bringing inflation down will fall on the Fed's efforts to reduce demand — meaning a more severe downturn than might occur otherwise.

The backdrop: The extra-large postwar generation born between 1945 and 1964 has been shaping the economy for seven decades. As they stop working, their contribution to economic output vanishes, while their consumption continues as they spend down retirement savings.

  • The generations coming behind them are smaller and immigration rates have fallen, making for a less favorable "dependency ratio" of those working to those not.
  • For example, in the year 2000 there were 3.6 adults in their prime working years between 25 to 54 for every adult over age 65. Now, that ratio is down to 2.2, and still falling.

What they're saying: "An aging population will hurt the U.S. economy’s ability to grow without creating inflation longer term," BlackRock Investment Institute researchers argue in a new commentary.

  • The demographic realities make "it hard for the economy to operate at current activity levels without fueling inflation," wrote Jean Boivin, Alex Brazier, Wei Li, and Nicholas Fawcett.
  • "The Fed would need to crush activity to push inflation back to its target," they add.

Flashback: For years, economists have looked at aging populations as a potential explanation for persistently low inflation and interest rates.

The intuition: The super-sized Boomer generation has spent decades accumulating assets in preparation for retirement, creating a savings glut, while also moving through prime years of their working life.

  • With the youngest of the generation now 58 and the oldest 77, those trends may be in the process of reversing, with millions flowing out of the labor force and their savings rates turning negative.
  • The underlying demographic forces are slow-moving and inevitable. What is more surprising is that they coincide with high inflation also fueled by global supply constraints and excessive pandemic-era stimulus.

The bottom line: Demography is destiny, and in this case means bringing inflation down may not be easy.

Originally published by Axios.

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