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  • Frank Tian

Aging Effect on Inflation

Recession with Full Employment?


The macro trend underneath …


US Q2 GDP Y/Y growth is -0.9%, according to BEA’s advance estimate today.


This follows the -1.6% Y/Y growth in Q1.


Two-quarters of GDP contraction means a Recession if you go by the mechanical rule, which is used by many countries.


However, in the US, the recession will be called by the NBER committee, based on other factors such as Gross Domestic Income.


Whether it is officially called a recession or not, we are in a weird spot.


Contracting GDP + High Inflation + Full Employment


Much can be blamed on the pandemic and the war.


Stripping these short-term shocks away, there is a macro trend in working for a long time.


The Demographic Shift


The growth of the prime age population (age 25-64) is significantly slowing down.


This phenomenon is not unique to the US. The whole world is aging.


Proportionally, we have fewer workers.


Implication to Inflation


BIS studied the age effect on inflation in 2018.


The older age group does not need much, so it should be deflationary - that is only after 75.


Age 55-74 is inflationary, as the spending in early retirement does not necessarily go down, while healthcare cost is up.


Age < 20 is inflationary - right, those expensive kids.


The Pandemic Shock


The pandemic drove many into early retirement. It is not worth the health risk to continue the grind.


Production and transportation were constantly disrupted. This amplifies the supply issue.


On the other hand, the pent-up demand is real, from all age groups.


One thing people begin to realize: we do not own anything.


House equity, stock, bitcoin - all wealth on paper.


Only when you spend on yourself,


For food or experience,


That becomes yours.


Post The Crisis


All crises will be over. After the short-term shocks go away, inflation will drop.


However, it may not go below 2% anymore.


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