Population/Demographics Inflation Theory


The Reverend (Thomas) Robert Malthus
Source: “Thomas Robert Malthus” by John Linnell
Licensed under Public domain via Wikimedia Commons


Economists like Keynes took their influence from many sources. One of these was a late 18th Century economist, the Reverend (Thomas) Robert Malthus. Malthus proposed that long-term inflation was a result of the ever-increasing population. He suggested that the human population had the potential to grow exponentially. A key problem with this according to Malthus was that the increased supply of commodities used for our basic needs tended to grow only arithmetically. This mismatch created competition for resources, which caused prices to rise, especially in times of rapid population increases.

Malthus was writing at just one of those times in history. His theory fitted well with the previous waves of price increases in the 13th and 16th Centuries prior to that. Both of these were associated with marked rises in populations. Following Malthus’s death, the 20th century witnessed an enormous surge in the world’s population. From 1950 until 2013 the population almost trebled, from 2.5 billion to 7.2 billion. This period also saw the world’s largest increases in prices ever recorded.

Population and prices

Source of population statistics: 1300-1950: McEvedy, C., and Jones, R., 1978, “Atlas of World Population History” and 2000-2100: Sanyal, S., 2013, “The Wide Angle Predictions of a Rogue Demographer”. Source of prices: Phelps-Brown and Hopkins, 1956, and ONS.

But correlation does not infer causality. In addition, the fit with population increase is not precise. It does not explain why in the 19th Century, when populations continued to rise, prices were so stable. One explanation is that the pressure on prices in the UK was less during the 19th Century due to expanding resources provided by the Empires. Another factor was that during that time the UK owned the world’s reserve currency and this may well have helped keep prices in check, relative to population.

The theory that inflation is related to demographics has had something of a renaissance in recent years. For example Harry Dent, the US economist and author, has written a number of books proposing that the demographic profile of a country is strongly correlated with its economic prosperity. The main thrust of his argument is that people’s expenditure increases through their lives until the late 40s and then declines. Therefore when there is a rise in the number of younger people in a population it leads to inflation and, similarly, when the average age of the population rises significantly, you get deflation as the net expenditure declines.

Expenditure by age

Source: ONS Family Spending Survey, published 2013.

In addition, other factors beyond population, such as the money supply, have undoubtedly contributed significantly to price rises, especially in the short to medium-term. However Malthus was probably right that population growth can be a contributing factor to long-term inflation and is often the trigger for the start of a new secular wave of inflation. (See: Inflationary Wave Theory.)