Martin Wolf answers your questions: Topic six - Deflation in western Europe and the US

We invited readers to send questions this week to Martin Wolf, the FT’s chief economics commentator. Here is the sixth question, from Simon Israel. Martin’s response is below.

Simon Israel: Deflation is entrenched in Japan. Could the ageing population be a causal factor (quite apart from the proximate monetary and fiscal aspects)? If so, does this presage deflation in the ageing economies of western Europe and America?

Martin Wolf: I have never understood why ageing per se should be deflationary. Ageing shrinks aggregate supply (because the labour force shrinks) and lowers household savings (because pensioners save less than people at work, particularly those in their 40s and 50s). So I tend to expect ageing to be inflationary: more demand and less supply. This will be reinforced by the fiscal effects of ageing, which are going to be far bigger than those of the current crisis. With bigger fiscal deficits, monetisation of those deficits seems relatively likely, in the long term.

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