Climate change and aging populations will lock-in high inflation for decades

The inflation surge of the past two years is a warning about what can happen when sudden changes in the things we want collide with massive disruptions in our ability to make them. While current inflation slowed to 4.9 percent in April according to Labor Department data released today, after more than a year of Fed interest rate hikes, it’s likely to fade eventually as the Covid-19 pandemic and its associated policy responses continue to normalize. But this victory may ultimately prove fleeting: compared to the relative stability we’ve come to take for granted over the last few decades, price changes in the decades ahead could be far more volatile, while underlying inflation could be faster and more persistent than in the recent past. That’s because we’re poised to endure at least two major social transformations this century that will reshape the economy — and heighten inflation risks. The first is the compounding effects of climate change, which will require massive investments in everything from sea walls to electric transmission lines to clean power generation. We’ll also need to find replacements for traditional plastic and discover greener ways to produce cement, steel, and meat economically. It’s a transition that, all together, will require trillions of dollars in new investment. And we will have to do all of this as worsening fires, droughts, and floods — along with climate-related migration flows — threaten to destabilize many societies and destroy productive capacity. This “green transition” is set to coincide with another unprecedented threat to social and economic stability: an aging and eventually shrinking population. By the end of the century, high-income countries and China, which together have consistently produced about 80 percent of the world’s economic output since at least 1960, are projected to lose more than 40 percent of their working-age populations — even as their elderly populations are poised to rise by roughly 60 percent. This “gray transition” will be extremely costly, requiring fewer people to work harder and longer to support a growing number of non-working retirees. Handled badly, either of these transitions alone would be enough to generate years of unwelcome price increases as businesses and consumers struggle to adapt to massive changes in the mix of goods and services we need, changes to the ways we produce, and impairments in our overall ability to produce anything. Together, they’re a recipe for prolonged and painful inflation.