The longer we live, the more we can expect the cost of living to keep rising, according to new research.
A shrinking working-age population across the world linked with increasing demand from retired workers is making goods more expensive and is likely to impact on living standards for decades to come, says the study by Deutsche Bank.
But inflation is a policy choice for governments who may well decide to the financial system is a better alternative to paying off billions in borrowings with a smaller workforce contributing to revenues.
“While we remain in a fiat currency world the temptation for a great inflationary reset at some point will be ever present.
Constant prices for centuries
“Inflation in a fiat currency world is a political choice and easy to create if there is the appetite and the appropriate policy response,” said the report from Jim Reid, a Deutsche Bank strategist.
“Our feeling is that this will eventually be the route many countries choose to reduce their debt burden. Governments would in this case continue to run deficits for a long period of time and ensure that central banks monetise this debt in some form or another.
“This is likely to create inflation at a time when wage pressures start to build naturally due to smaller working-age populations.”
The report The history (and future) of inflation details how prices were constant until the world population growth spurt started at the time of the Industrial Revolution in the early 1800s.
What real prices show
“It took 649 years for nominal prices to rise 887%, until 1939 (0.4% annualised). However, in the last 79 years, prices have risen 41,363% (8% annualised). This is not simply an inflation story. Between 1290 and 1939, the real adjusted price of a UK house fell 49%,” said Reid.
“In the last 79 years real prices have climbed 834% (3% annualised). We see a similar picture of extremely strong returns for many risk assets across the globe over 1950-2000 in nominal and real terms.”
The future could hold a return to a fixed money supply, similar to the gold standard, to tackle high inflation, while prices could fall once the current wave of an aging population passes.