Mobile phones were still a rarity. Shopping online was a thing of the future. The launch of football’s Premier League was looming. This was Britain in March 1992, the last time the annual inflation rate was as high as it is today.
Nobody under the age of 30 can really recall when the cost of living was a pressing political issue. There have been the occasional surges, usually caused by a rise in global oil prices, but nothing to match what has happened in the past six months.
Even longer memories are needed for the time inflation hit its postwar peak in August 1975. Then the annual rate climbed above 25%, prompting a run on sterling, double-digit interest and a bailout from the International Monetary Fund a year later.
For many years, it looked as if inflation was something to be read about in history books. In the late 1990s the economist Roger Bootle opened a book by asking readers to envisage “a world without perpetual inflation”, where prices would rise some years and fall in others, where in a good year pay would rise by between 2% and 3% and interest rates would fluctuate between 2% and 4%.
Bootle’s book – The Death of Inflation – stirred up what he called a “hornet’s nest of criticism” at the time, but by and large what he predicted came true. By the late 1990s the period of high inflation lasting from the early 1970s to the early 1990s was pretty much over.
During that two-decade period, inflation was akin to the impact of an earthquake. There was a big initial shock in 1973-4 followed by a series of aftershocks each less severe than the last. UK inflation peaked at 27% in 1975, just over 20% in the early 1980s and 11% in the early 1990s. It has never subsequently been anywhere close to 10%.
Economists such as Bootle came to see the 1970s and 80s as the exception rather than the rule. Historically, periods of high inflation have tended to be during wars, when governments run the economy as hot as needed to ensure national survival and ignore the risks of overheating. The first real sustained inflationary pressure in the UK after the Napoleonic wars came when the first world war broke out. According to the Bank of England, a basket of goods costing £10 in the year of the Battle of Waterloo would have cost just £7.72 at the time of the assassination at Sarajevo. In the intervening period, inflation averaged -0.3% a year.
There were reasons why the 1970s and 1980s bucked this peacetime trend. The global economy was at the end of a prolonged period of strong, sustained growth. Governments’ main economic priority was full employment. Capital controls and tariffs were deployed so countries could pursue expansionary strategies with little fear of being punished by the financial markets. Trade unions were far more powerful and could bargain for high wages to compensate their members when prices rose. Large parts of the world – China, India and the Soviet Union – were closed or only partially open economies.
That world was disappearing by the early 1990s. Governments saw inflation rather than unemployment as the biggest threat. Trade union power had been diminished. Capital controls were abandoned and tariffs reduced. Above all, western consumers were starting to benefit from the cheap goods produced in China and other Asian countries.
As a result, it has been clear for a while that it would take something exceptional for inflation to make a comeback. Something that would throw a spoke in the wheels of globalisation, make governments keener on self-sufficiency and persuade central banks of the need to embark on massive stimulus projects. Something like a global pandemic, for example.