The interest rate on my student overdraft in the mid-1970s was 17%. I responded by spending even more. After all, inflation had hit 24%, so the Clydesdale Bank was effectively paying me to borrow their money.
An inflationary world is a mad world. Inflation can rise so fast and so far that firms cannot keep up, and do silly things. Like subsidising my profligacy and otherwise spending money on projects that in a normal world would never be considered.
The Office for Budget Responsibility figures that UK inflation will be at 8.7% by year-end, but remembering what I do from the 1970s, I figure that might be optimistic. And it’s highly damaging. After three years at that level, inflation has shaved almost a quarter off your savings. After seven, you’ve lost nearly half.
That’s bad all round, but it’s particularly bad for young people, who have already lost out to the baby boomers thanks to the miracle of public borrowing. And planning controls too: with house prices spiralling because planners and NIMBYs won’t let us build enough houses for our increasing population, the savings-destroying effect of inflation makes the prospect of getting together a deposit increasingly remote. And because incomes are being eaten by inflation, it becomes harder for people to save at all.
That in turn prompts another damaging effect. As inflation erodes incomes, workers demand more money to compensate. And if inflation is high, they demand not just enough to balance what they’ve lost in the last year, but even more to provide for what they expect to lose in the next. That is why, in 1972, with inflation heading over 20 per cent, coal miners demanded a 43 per cent wage increase. As did others.
Meanwhile, employers see their other costs rising too, so affording wage rises becomes harder, and heightens tensions between employers and employees. And since nearly 18% of the UK workforce is government workers, taxpayers come under pressure too.
So, employers look to other ways to reduce their costs. They might use cheaper inputs to make their products — products which probably end up lower-quality as a result. One of the easiest things to cut, of course, is investment. Which gives us lower productivity and the dismal prospect of stagflation: prices rising but the economy going nowhere.
We can’t blame the government entirely for rising food and fuel prices, but even in the best of circumstances, overspending seems a way of life to them. Since March 2020, the Bank of England has bought £875 billion worth of government IOUs, simply creating more money to pay for it. But money is like anything else. The more of it there is around, the less it’s worth.
Sure, the Bank is now being a bit more cautious, but no central banker wants to inflict pain. Yet the lesson of the 1970s, again, is that those countries (e.g. Germany) that acted swiftly on inflation recovered much faster than those (e.g. UK) that thought the required belt-tightening was too painful.