UK’s ageing population is long-term threat to economy: Bank of England chief
Britain’s ageing population poses a long-term threat to the economy and will affect interest rates for decades to come, Andrew Bailey has said.
The Governor of the Bank of England identified changing demographics as one of two biggest problems facing the UK and similar countries in the years ahead, along with stagnant productivity since the financial crisis.
He suggested that these challenges would have more of an impact in the long run than the war in Ukraine and the Covid crisis, which have combined to drive inflation to its highest level in decades.
Setting out the challenge from these two “long-term shocks” at a conference in France, Bailey said: “One is an ageing population in the world. Two, for most of us, is very low productivity growth since the financial crisis.”
It would be a serious mistake for central banks to ignore these shocks in their efforts to control inflation and maintain financial stability, Bailey said.
UK’s declining birth rate means that the number of over 85s is expected to almost double from 1.7 million in 2020 to 3.1m by mid-2045, according to the Office for National Statistics – equal to 4.3pc of the population.
This is likely to take demand out of some parts of the economy as older people typically spend less and an increasing share of workers’ income is swallowed up paying for their care.
In Japan, which is further along this path than Britain, the result has been economic near-stagnation, lower inflation and lower interest rates.
However, analysis by Blackrock earlier this month suggests that an ageing workforce could actually push inflation higher in the West by stoking demand in certain industries such as healthcare.
UK has been suffering from cost of living crisis since 2021
Since late 2021, families in Britain have seen a huge drop in disposable income during the cost of living crisis as inflation pushed up prices of food, petrol and household items while wages failed to keep pace.
Inflation hit an all-time high of 11.1% in October 2022, far outstripping the government target of 2%, which has been missed for the last 18 months.
The cost of living crisis has pushed many families onto the breadline, with increasing numbers unable to afford fuel or basic groceries.
Rising inflation over the past 18 months has seen price hikes on everything from Lurpak to petrol, with inflation hitting a 40-year high of 11.1% in October 2022 and currently sitting at a slightly lower 10.1%.
This is way above the government's target of 2%, a level designed to maintain a balance to protect the economy.
If the rate of inflation goes too high, prices are pushed up and consumers suffer. If it is too low, the economy can become stagnant and hamper future growth.
Food prices remain at record highs despite inflation falling for the third successive month in January as price drops take a while to make their way from suppliers to consumers, meaning people are still paying more for their weekly shop.
Meanwhile, ongoing issues with food supply chains (such as bird flu) are continuing to push up prices of specific goods.
Indeed, the Resolution Foundation said in September 2022 it predicts 3 million more people will fall into poverty in the UK, with household income expected to fall by £1,100 in 2022-23.