The measures of inflation are also very different. In the 1970s, the inflation basket was mostly comprised of household goods. Today, services comprise a much bigger portion of our spending.
Also, central banks are much more equipped now with multiple tools other than headline interest rates. They have strong inflation mandates and, in theory at least, independence to act. The current model of central banks has often been cited as the reason that inflation was fought off in the 1980s.
Then there is the velocity of price rises. Sure, we have not seen anything like the speed at which commodities rose for nearly 50 years, but back then demand and supply were mostly industrial. Today, the derivatives market is enormous, cash to lever is cheap and speculation runs rampant. Prices can fall as easily as they rose, if the ‘fast’ money decides there is no real reason to pay for contracts to ‘roll’ for a long time.
And of course there is unemployment to consider. The 1970s featured slow growth and higher unemployment. Today, unemployment is very low and labour participation rates are below pre-pandemic lows in the UK and the US. As the pandemic passes, those who had to stay at home may yet again join the labour force and ease wage inflation pressures. In the UK the situation is slightly more perplexed, of course, because of Brexit, but there are still plenty of Britons who abstain from employment due to Covid-related issues.
Additionally, there is China and the global supply chain. While China’s turn to its internal market is definitely inflationary, the country still produces a lot of cheap goods for the world. So do many other emerging economies, all served by global supply chains. We think that modern logistics is powerful and can be counted upon to efficiently get goods from point A to point B when initial shocks have passed. Case in point, UK exports to the EU are currently above pre-Brexit levels.
Finally, we cannot ignore the biggest difference of all: the ‘green drive’. In the 1970s, addiction to oil was a powerful geopolitical force. Today, the world is determined to wean itself off fossil fuels altogether. The longer oil prices remain very high, the more money will be diverted towards finding alternatives and the quicker a fossil-free future becomes attainable. Investors are getting more interested in fusion, green hydrogen and ways to reduce the life of nuclear waste by the day.
We cannot be certain where inflation will peak, but, given its current impetus, we would not be surprised if it crossed the 10 per cent threshold. However, the peak is of little consequence compared to duration.
