Will Demographic Trends Drive Higher Inflation and Interest Rates?

Powerful demographic trends will cause higher inflation and interest rates, and a reduction in inequality as labor reclaims its bargaining power in the global economy, argue two British authors in a persuasive book.

That conclusion “caused a furor”1 when it came from the celebrated British economist and central banker Charles Goodhart, and Manoj Pradhan, a macroeconomist. It is the central prediction in their new book, The Great Demographic Reversal.

Why would these relatively anodyne forecasts cause a “furor”? What evidence do they present? And, most importantly, how will investors be affected if their predictions come true?

The controversy comes from the contrarian nature of their forecast. Mainstream thinking is that low inflation and interest rates are here to stay. This consensus is based on central bank statements of intent as well as the low-growth environment of an aging society with limited productivity gains.

But conventional thinking typically comes from extrapolating the recent past – a few years, a decade or two, at most a generation. Inflation and interest rates have been declining since the early 1980s, long enough to wipe the memory of earlier increases. Flouting convention, Goodhart and Pradhan base their forecasts on aspects of the present that they say will change radically.

They conclude: “Of one thing we are sure, the future will look nothing like the past.”