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The Resurgence of Inflation


The great demographic reversal and the retreat from globalisation will bring back stronger inflationary pressures—this is our highest conviction view. Worsening dependency ratios naturally raise inflation. The lesser availability of labour at home and abroad will serve to restore the (previously diminished) bargaining power of labour. It will also end up raising the equilibrium Natural Rate of Unemployment. Households will save less, and invest more in housing, than some mainstream models suggest. The non-financial corporate sector may have to invest more to hold down unit labour costs, though Goodhart and Pradhan are agnostic about the various causes for recent low investment rates. But they doubt that politicians, facing rising health and pension costs, will be prepared or able to raise taxes enough to equilibrate the economy via fiscal policy.

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  1. 1.

    For an account of the relative weight of demographics and monetary factors in the earlier European inflation between 1500 and 1700, see Melitz and Edo (2019).

  2. 2.

    Also see Schön and Stähler (2019), who note, p. 24, that, ‘Because savings increase sharply (and suddenly) on impact when people start realizing that they live in an ageing world the drop in the world interest rate is highest on impact’.

  3. 3.

    Even over much shorter time periods, the theory that borrowing/saving is primarily done by households in order to smooth consumption is not fully supported by the facts. Thus, Hundtofte et al. (2019) state that ‘on average – individuals do not use borrowing to smooth consumption when they experience a typical transitory income shock of unemployment. Instead, individuals smooth their credit card debt and overdrafts by adjusting consumption’. As a result, the demand for credit is procyclical, amplifying the business cycle.

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Correspondence to Charles Goodhart .

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Goodhart, C., Pradhan, M. (2020). The Resurgence of Inflation. In: The Great Demographic Reversal. Palgrave Macmillan, Cham.

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  • Print ISBN: 978-3-030-42656-9

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