Long Read  

Inflation: (not) that 70s show

Inflation: (not) that 70s show
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Inflation was dead. Or so we were told.

For two decades prior to 2000, inflation would occasionally spike, mostly due to energy disruptions, but overall price rises would be increasingly moderate.

After the turn of the century, when China took its place as the world’s appointed manufacturer, that trend accelerated. China would import growth and technology and export deflation, in the form of cheap manufactured products.

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The 2008 global financial crisis happened, and global central banks printed nearly $18tn (£13.7tn) of new money. To everyone’s surprise, prices remained the same and inflation’s death certificate was issued in absentia.  

And then, 2021 came. Prices began to rise at the fastest pace in nearly half a century. Central banks spent two quarters in denial and then made an about-turn at the end of the year, scrambling to get ahead of the curve before it was too late. As policymakers lost their calm, markets soon followed.

Investment managers, a lot of whom have never really experienced inflation, are now scrambling to find historical paradigms that could provide a guide for the future. 

None has served so well as the 1970s, a dismal decade in global economic history. In the UK, from 1969 to 1982 prices rose 12.5 per cent every year on average. Evidence shows that inflation has not climbed as fast as it does today since 1979. 

The period was characterised by economic stress, a flood of fiat money and persistent geopolitical instability, all of which fuelled inflation to a boiling point.

Substitute Ukraine for Israel (Yom Kippur War) and one gets a seemingly perfect fit. The war comes on the back of already quickly accelerating prices because of pandemic-related supply chain disruptions. Sanctioning Russian raw materials exports on top of present pressures makes runaway inflation a real risk.

Where will it stop?  

The number that stands out is 26.5 per cent. This is the historic highpoint of the UK RPI, registered in August 1975, a few months after British coal miners accepted a 35 per cent raise from the government. In that year alone, households saw a quarter of their savings evaporate because of inflation.

However, we do not necessarily favour the historical approach. Drawing parallels between the 1970s and the present might help a history PhD candidate attain a degree, but it would probably ill-serve those whose decisions have tangible and not theoretical consequences. Investors and economists, whose conclusions may affect policy or individual wealth should probably avoid the industry’s obsession with all things past.

This is not the 1970s all over again

For one, the underbelly of inflation is different. In 1971, Richard Nixon had rejected the gold standard and global economies entered the era of monetarism and fiat currencies. Inflation, in hindsight, was a normal consequence. Conversely, the world up until a year ago was characterised by secular stagnation, a consumer propensity to save rather than spend, which is deflationary in nature. We have no evidence that this has changed.