Age structure and consumer price inflation in Australia

This thesis assesses the links between age structure and inflation in Australia. This is the first study, to our knowledge, to use disaggregated data to clarify the links between age structure and inflation. The aim is to shed light on some of the contentious issues in the research to date and to quantify the likely impact of Australia’s aging population. Faust and Wright (2013), in their comprehensive review of inflation forecasting, concluded that attention must be paid to improving the modelling of low frequency changes in inflation to reduce forecast errors. Age structure models have the potential to deliver this improvement and contribute to inflation forecasting. This thesis assesses the effect of different parts of the age structure on the common factors driving inflation and on disaggregated price inflation. It also estimates the relative impact of the young, middle and early old age cohorts on aggregate inflation, and uses these estimates to project inflation forward. The main finding is that age structure is important for inflation in Australia. All the analysis points to a consistent picture: younger age cohorts add to inflation, while late middle age and older cohorts reduce inflation. The mechanism of action is likely to be through changing relative demand and thus prices. The results suggest that the aging of the population will subtract from inflation significantly over the next ten years.