We are now seeing the return of the demon of inflation – a monster we thought had been slain thirty years ago. For younger people, this is going to be a whole new experience. I mean, how bad can it really get? Well, if we look back to the 1970s and 1980s when I was a kid and a young man – it can get really bad. Unlike unemployment, which has a very visible and obvious effect, inflation is a semi-visible menace eroding living standards on multiple fronts. You may still have a job but your wages are buying less and less. By degrees, inflation pushes a growing number of people into poverty and even starvation.
So – what DID inflation look like in the 1970s and 1980s – and are we in a time machine hurtling back to the era of jumbo price rises?
UK inflation fuelled by Arab oil then and Ukrainian wheat now
In 1973, America’s petrol stations were clogged with angry motorists. On the approach roads were long lines of cars that needed filling with petrol. But demand was far outstripping supply. Something had gone wrong with the petrol-head utopia that the auto and energy sectors had been promoting for decades. This was the mid-70s oil shock when Arab oil producers decided to punish the west for supporting Israel in the October 1973 Yom Kippur War. Their oil embargo saw the price of crude oil quadruple.
This sent UK inflation soaring to 24%. The stock market took a nosedive. Corporate profits fell. Production costs rose deepening the crisis in British manufacturing that would lead to collapse in the early 1980s. But for some players in the energy sector, the crisis had a silver lining as North Sea oil production was boosted. There was also the beginning of a serious debate about renewable energy with the realisation that oil producers, even supposedly friendly ones, could turn against you.
Suddenly, the OPEC cartel meeting of oil producers in Vienna went from being something you (never) read about in the Financial Times to headline news on the TV. OPEC stands for the Organisation of the Petroleum Exporting Countries, in case you didn’t know. And Sheikh Yamani, the Saudi oil minister, became a well-known figure. We can thank him for resisting an Iranian demand to increase the price of oil from $3 to $20 a barrel – which would have really screwed the western economies.
Yet here we are in 2022 with Vladimir Putin pointing his gas gun at Europe and threatening to turn it off if we don’t comply with the Kremlin’s will. And an economic shock in the form of the Ukraine conflict that has not only affected the energy sector but also foodstuffs. Across the world, countries that rely heavily on wheat from the Ukraine and Russia are reeling at the increasing cost of basic food items. Who would have thought that Putin’s decision to send the tanks into a neighbouring country would lead to families in Britain and elsewhere having to choose between two or three meals a day?
FIND OUT MORE: Britain in the era of nationalised industries
Wages and inflation – what is the relationship?
In the 1970s, inflation busting pay increases negotiated by powerful trades unions representing entire industries or sectors were blamed for causing inflation. In reality, unions were making pay demands in anticipation of almost certain price increases in the year ahead. Meanwhile corporates were raising prices in order to protect their profitability. And so was born a vicious cycle.
Here and now, we’ve got relatively low levels of unemployment and lots of jobs available yet there is still a downward pressure on wages. In the past, the logic would have run that demand for labour would push the level of wages up. But today, that isn’t happening. Why? One obvious factor compared to the 1970s for the failure of wages to keep pace with price inflation is the weakness of organised labour. Workers no longer have the collective bargaining power they once did. The threat of strike action has diminished and working terms and conditions are more skewed towards the employer than the employee. Creating what is often termed a ‘flexible’ labour market.
In February 2022, the Governor of the Bank of England Andrew Bailey called on firms and workers to exercise ‘restraint’ on prices and wages respectively. There’s little evidence of workers being in any position to increase their wages to keep pace with inflation – especially in the private sector. The same restraint though has not been practised by many firms seeking to protect their profit margins. In effect workers are being squeezed to keep profits buoyant.
Bailey, by the way, earns around half a million pounds a year. Even the Conservative Prime Minister Boris Johnson felt obliged to slap him down over his call for wage restraint – but on the reassuring assumption that workers aren’t really able to do much about the situation.
Thatcher and inflation
The late 1970s saw interest rates hiked to kill off inflation. From 1979, the Thatcher government adopted what was termed a ‘monetarist’ economic policy. The belief was that by controlling the money supply – inflation could be reduced. Higher interest rates, higher taxes (shifting from income tax to VAT which soared from 8% to 15%) and deep spending cuts. This was Thatcher’s medicine for Britain. But linked to her anti-inflation policies were her political aims: reducing the role of the state in the economy and smashing the trade unions.
This policy did eventually bring inflation down but it took great swathes of manufacturing industry with it. There was also a massive increase in unemployment, which became ingrained in many communities. As for controlling the money supply – well, the supply actually increased despite all the pain. In 1981, a total of 365 economists wrote a letter to The Times begging Thatcher to drop her monetarist credo. The link between money supply and inflation was clearly not as strong as she thought and persisting with this approach was causing unnecessary damage to the UK economy. By 1984, Thatcher had quietly dropped money supply targets.
A return to ‘stagflation’?
So-called ‘stagflation’ was an economic ailment of the 1970s. A toxic combination of high unemployment and high inflation. It could be making a comeback. The World Bank has warned that feeble economic growth and price rises could be our immediate future. But the consensus view among economists seems to be that we won’t see a return to full-blown 1970s style stagflation. That said – it still won’t be a pleasant experience!
In the 1970s, Tory ideologues like Keith Joseph openly said that Britain was too fearful of unemployment compared to inflation. This mindset, Joseph believed, was a legacy of the 1930s Jarrow hunger marches and images of people desperate for work. In Germany, by contrast, the anxiety was always more focussed on inflation. Germans had experienced stratospheric levels of inflation under the Weimar Republic in the 1920s when workers took their wages home in wheelbarrows. I have Weimar banknotes and postal stamps that were denominated in the millions and even a billion. But Britain had never known that kind of hyper-inflation. The threat of the dole was a far more ominous threat.
The Tories then, as they took power in 1979, viewed unemployment as the lesser evil. It also had the additional benefit of being a weapon to cow the powerful trades unions. This attitude towards joblessness represented a major political shift from the approach of post-war governments. In March 1981, one academic paper urged a rethink as unemployment headed towards three million – 13% of the workforce. And in some areas, a fifth of the population on the dole.
Many young people were now leaving school and registering for unemployment benefit. As opposed to either getting a job or an industrial apprenticeship. The report authors warned that Thatcher’s supply-side economics focussed solely on inflation “could lead to widespread social unrest”. Well, a month later, Brixton exploded into rioting followed by a summer of urban disturbances that saw Liverpool, Manchester and other cities ablaze.
Comparison with today’s inflation
Well now – does anybody remember when pundits claimed that the ending of Covid lockdown would unleash “the roaring 20s”? Yeah, that seems a long time ago. The comparison being made these days is to the 1970s with high unemployment plus high inflation and stagnant economic growth. It was a decade where stock markets were incredibly volatile and overall lost value. The best investments of the 1970s were gold, oil and wheat.
Of course there are many policy makers around today who have a vivid recollection of 1970s stagflation. And they assure us that lessons have been learned and it’s impossible for all that to happen again. When I hear that kind of talk – I reach for my tin hat. The main arguments are that inflation is taken more seriously and we’re far more sophisticated about dealing with these economic problems. But in the final analysis – what most City wags pin their hopes on is the weakness of organised labour. Keep the workers down – and capitalism should survive!