If the disinflationary effects of demographics and AI-driven productivity gains offset the inflationary effects of persistent government deficits and debt monetization, the long-run inflation outlook may be more balanced than the current consensus expects.
Birth rates in rich countries have been falling for decades and recently have taken another leg down. All major economies, including the United States (about 1.6), China (~1.0), Japan (~1.2), Germany (~1.4), the United Kingdom (~1.6), and Canada (~1.3) have birth rates well below the level necessary to maintain a population, 2.1 births per woman.
The chart below compares smoothed CPI to the U.S. fertility rate lagged 20 years. Academic literature finds a linkage between an increase in the number of children and inflation.1. Children create demand for goods, as their parents buy houses, clothes, bigger cars, sports, furniture, etc., but children do not offset their consumption with work. All else equal, a society with a higher percentage of young adults and children has more excess demand for goods and services than one with an older population.
Likewise, academic research shows that productivity and efficiency gains from new technology follow a J-curve path.2. Early on, the rapid growth in spending on infrastructure, data centers, and semiconductors for automation is inflationary, increasing demand for resources without meaningfully improving economic output or productivity.3. Productivity and efficiency gains occur in the later phases of a technological revolution. AI and capex spending is inflationary today but could be deflationary long-term if it increases productivity and displaces labor.
Inflation concerns stemming from uncontrolled government deficits and fiat money printing are valid, but less discussed demographic and technological innovation trends may have an underappreciated and offsetting deflationary impact.
1. Juselius & Takáts, “The Enduring Link between Demography and Inflation,” BIS Working Paper 722, 2018.
2. Brynjolfsson, Rock, & Syverson, “The Productivity J Curve: How Intangibles Complement General Purpose Technologies,” American Economic Journal: Macroeconomics, 13(1), 2021.
3. Solow’s Paradox – Economist Robert Solow famously said in 1987 that the computer age was everywhere except for the productivity statistics.