Kansas City Federal Reserve President Jeff Schmid sees an unexpected upside in America’s aging population: the surge in healthcare spending is driving economic growth. Yet the same trend is also contributing to persistent inflation, presenting a challenge the Fed struggles to control.

In a recent speech, Schmid highlighted that healthcare spending was the single largest contributor to consumer spending growth in 2025. The aging population, particularly those over 75, is entering a phase of rapidly increasing demand for medical services, which has fueled this spending.

Healthcare spending overtook housing and utilities in early 2023 as the fastest-growing category in the personal consumption expenditures (PCE) price index, the Fed’s preferred inflation measure. By the third quarter of 2025, healthcare accounted for nearly half of all spending growth and contributed nearly a full percentage point to overall economic expansion.

Beyond driving growth, healthcare has also been a major contributor to the labor market. The sector added 686,000 jobs in 2025, accounting for more than all gains in nonfarm payrolls. “Job growth is slowing, yes, but not in free-fall, thanks to healthcare,” noted Andrew Flowers, chief economist at Appcast.

However, the costs of healthcare remain a stubborn source of inflation. Unlike housing or other cyclical sectors, medical spending does not respond to economic slowdowns. People still need treatments like chemotherapy regardless of the broader economy. The San Francisco Fed categorizes healthcare as an “acyclical” inflation component, meaning it moves independently of the business cycle and is largely immune to traditional monetary policy tools.

Healthcare accounts for roughly 16% to 17% of PCE. With core inflation running at about 3%—above the Fed’s 2% target—healthcare has been a major reason why inflation has been difficult to bring back to target levels.

Demographics also pose long-term economic challenges. While spending boosts growth now, the shrinking labor force could limit future expansion. By 2030, Americans over 65 will outnumber those under 18 for the first time, and the number of new jobs needed to maintain stable unemployment has fallen from 150,000 a year ago to 77,000 today, according to the Kansas City Fed.

Immigration has long been seen as a way to fill this labor gap. The Congressional Budget Office projects that immigration will account for nearly all U.S. population growth over the next decade, and even more after 2031. Yet stricter immigration policies have slowed inflows, creating what economists call a “demographic wall.” Joseph Brusuelas, chief economist at RSM, warned that without replacement populations, the retirement of baby boomers will strain the economy.

Despite these concerns, some analysts argue the negative outlook is overstated. People are living longer and staying healthier, effectively extending working lives. Goldman Sachs noted that a 70-year-old today has the functional capacity of a 53-year-old in 2000, helping mitigate labor shortages.

For investors, this demographic trend benefits healthcare stocks. Demand for services is structural, not cyclical, meaning it is largely unaffected by recessions or monetary policy shifts.

Ultimately, while the aging population presents challenges for labor supply and inflation management, it also creates durable growth opportunities in healthcare. As Schmid emphasized, Washington may shape policy, but it cannot legislate away the reality of an older, longer-living population.

In short, healthcare spending is a double-edged sword: a key engine for the economy, but also a persistent driver of inflation that the Fed cannot easily tame.