Population Growth and Inflation (Moody’s Analytics paper)

This analysis investigates the relationship between population growth and inflation. Panel models demonstrate a strong association between population growth and inflation in both cross-country data and across a sample of U.S. metro areas. The metro area results are highly robust, including an instrumental variable approach and long-run models using decadal changes over 90 years of data. The metro area analysis suggests that the housing market is the main mechanism through which population growth affects inflation, likely because of regulatory and physical constraints that keep land and housing relatively inelastic in many places. There is suggestive evidence that the relationship between population growth and inflation is nonlinear, with population declines having a stronger effect than population growth. This is consistent with relatively permanent housing stock that declines only slowly in response to declining population. Overall, these results suggest that slowing population growth can be a headwind for inflation and help explain why inflation has remained stubbornly weak in some places.