Global population decline will drive up inflation long-term, ECB’s Isabel Schnabel says

im 15594889

Global population decline is set to drive up the cost of labor and lead to a drop in global output that is likely to see inflation pressures surge over coming decades, European Central Bank executive board member Isabel Schnabel said.

In an interview with the Financial Times, Schnabel pointed to predictions made in a 2020 book by economic historian Charles Goodhart, which argues worldwide population decline will lead to a reversal of recent trends that have seen inflation rates stay low in recent decades.

Goodhart’s 2020 book – titled ‘The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival’ – argues that falling populations worldwide will drive up inflation by creating labor shortages that will see workers’ bargaining power increase.

The 2020 book says aging populations will also see governments forced to pay out more in pensions and healthcare costs for growing ranks of older people, who will be increasingly burdened with currently incurable problems of cognitive decline like Alzheimer’s disease.

Goodhart’s book also predicted an immediate spike in inflation following the pandemic, due to the expansionary monetary and fiscal policies pursued during COVID-19.

Schnabel said Goodhart’s warnings were previously “disregarded” and deemed irrelevant by the ECB’s central bankers, following publication of his book in 2020, as she argued economists were stuck in their view that low inflation would continue to be the main concern. 

The German economist, who has been a member of the ECB’s executive board since 2020, also blamed the ECB’s overzealous belief in its own forward guidance for its late action in hiking interest rates following the surge in inflation after COVID-19.

The central banker said economists should now start taking a longer term view of history and come to terms with the fact that the world of tomorrow will not necessarily be the same as the world of today,

“The problem was that we were so caught up in our thinking and this also influenced our policy reaction. We tied our hands too strongly by forward guidance,” Schnabel said. “This is the main reason why we were a bit late on both ending asset purchases and hiking interest rates.”

“Inflation was falling and turned negative in the second half of 2020. We had experienced too low inflation over many years. Everybody was concerned that inflation would remain low or drop even further,” Schnabel said. 

The ECB economist instead said central bankers should have heeded Goodhart’s warnings earlier, as she argued economists must now start to become more flexible in their perspectives, in realizing that economic conditions can rapidly change. 

“It would have been wise to listen to an economic historian like Charles Goodhart, who has seen the world changing many times,” Schnabel said. 

“What I’ve learned is that we shouldn’t believe that the world tomorrow will necessarily be similar to the world today. It can change very quickly,” Schnabel said. “Going forward, we should maintain more flexibility,” the ECB banker said. 

Schnabel said the ECB must also reconsider the way it issues forward guidance as she argued all future guidance should be conditional on economic data, rather than being absolute.

“If we ever went back to forward guidance, it should be of the Delphic type, which is a forward guidance conditional on economic data, but not the Odyssean type, where you tie yourself to the mast figuratively speaking,” Schnabel said.

Schnabel also said central bankers should be cautious about basing their decisions on movement in financial markets, as she warned that doing so could end up creating feedback loops.

“We have to be careful with these market-based measures, because we could be falling into the trap of Paul Samuelson’s monkey in the mirror,” Schanbel said. 

Neo-Keynesian economist Paul Samuelson’s “monkey in the mirror” analogy seeks to compare central bankers who read too much into market movements with a monkey who sees themselves in the mirror and believes that by looking at their reflection, they are receiving new information. 

Source link

About The Author

Scroll to Top