In 1989 we found a strong correlation between workforce growth rates on a 2 to 3 year lag and inflation, similar to that of our Spending Wave and economic growth and stock prices. The chart shows that correlation. There are obviously short term gyrations due to political and economic cycles, but the long term trend follows this indicator quite reliably.

Chart: The Inflation Indicator

Since the 1960s rising workforce entry by the baby boom caused rising inflation rates. But after 1980 we have seen falling and low inflation as these new workers and their new technologies have increased productivity rates. But the rising entry of the echo boom will cause inflation to rise modestly from 2004 into 2010. After that inflation falls because the larger baby boom will start to retire and offset the workforce growth of the younger generation and the economy will be slowing because of the Spending Wave.

After 2010, baby boom retirement will more than offset echo boom entry and create the first long-term slowing of the workforce since the 1930s with outright deflation as the trend rather than the disinflation we’ve witnessed since 1980. The combination of a slowing economy from declining baby boom spending after 2010 (See our Spending Wave article) and a slowing of workforce expansion will create a deflationary slowdown like the one the U.S. experienced in the 1930s and early 1940s and like Japan did ahead of us in the 1990s and early 2000s (due to not having a baby boom after World War II).

The consequences of a deflationary downturn are that businesses face a major shake-out that creates the longer-term leaders of the future, and stocks and real estate will decline to a much larger degree than in ordinary recessions or typical inflationary downturns like those in the 1970s. 2011 to 2023 will very likely be the most challenging time for our economy, businesses and investors since the 1930s. Businesses should gain market share during the boom that will last until 2010, but then be mean and lean ahead of the downturn and deflationary era ahead after 2010 – or choose to sell out by 2010.

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