In contrast, Britain in the 1970s had many more unionised workers than is the case today, meaning wages and employment rates today are likely to be less sticky, and more responsive to wider economic conditions than was the case during the 1970s, the last occasion on which the UK might have been said to be experiencing stagflation.
Gerard Lyons, chief economist at Netwealth, says the BoE’s determination to increase interest rates is a function of the bank’s desire to prevent the imported inflation caused by higher commodity prices "spilling over" into the wider economy via higher wages, the latter being the reason why he thinks inflation persisted in the UK in the 1970s long after the initial oil price spike dissipated.
George Lagarias, chief economist at Mazars, notes the level of wage growth will be the key determinant of how high inflation can rise, and wage growth will largely be determined by changes to the labour market participation rate – this is the quantum of people in an economy who are either employed or actively seeking employment.
Participation rates dropped in the immediate aftermath of lockdowns as many in lower wage jobs were able to remain on furlough or live on accumulated savings, while older workers were able to retire earlier.
Factors that contribute to the participation rate over the longer term include college attendance – Lagarias says “if the job market isn’t great people think they might as well go to college” – the pace of technological adoption in an economy and wage rates.
Tuning in, dropping out
Silvia Dall’Angelo, senior economist at Federated Hermes, says another factor that determines the participation rate over the longer term is the proportion of people of working age in the economy.
She says economists have generally taken the view that older people spend less than younger people, so having an ageing population is deflationary.
But she is increasingly of the view that an ageing population could actually be inflationary, as it shrinks the supply of workers in an economy and so puts upward pressure on wages.
Despite this, Dall’Angelo is among those who think that UK inflation is at or near its peak.
She says: “Provided there are no further supply shocks, I think we are at around the peak. I think inflation will stay around this level or maybe slightly below it, for the next year or so.
"Central banks have begun tightening monetary policy and, compared to the pandemic period, governments are tightening fiscal policy. And we are seeing the impact of high inflation on the wider economy now, pushing demand down.”
