Is Boris taking us back to the Seventies? Inflation is snowballing; to stop it would be painful

“Then the gas bill comes in, followed by the electricity, the rates, the phone bill, and a lot of others,” said Brian disconsolately. “I am just one of thousands, I suppose, but there is no comfort in company. And I’ve given up any notion of doing any better for my family.” Then Mrs B cut in: “We used to think we were really well off. Not any more.”

Such was life in the summer of 1975, the age of Showaddywaddy, 10cc and the Bay City Rollers. Harold Wilson was PM, Tom Baker was in his time-travelling pomp, Britain had just voted to remain in the Common Market and the Space Hopper was the fashion accessory du jour — and all the time, inflation just kept rising. 24%, 25%, 26%…

Today, the prospect of prices soaring at such breakneck speed seems like something from some mad fantasy. Yet inflation is back in the news, and understandably so. The Bank of England’s target is 2%; the most recent figure, for the year to August, shows inflation at 3%, and most analysts expect it to hit 4% before the end of the year.

As always, the causes are very complicated. The explosive recovery of the world economy after Covid, the global supply chain crisis, the huge surge in demand for fossil fuels, the spike in wholesale gas prices (up 250%, incredibly, since the turn of the year), the rise in shipping costs because of container shortages, the worldwide scarcity of semi-conductors, the dearth of lorry drivers, Brexit, Boris — you pays your money and takes your choice, basically.

By the standards of the Seventies, inflation of 4% doesn’t sound like much. In the summer of 1975, Britain’s Chancellor, Denis Healey, would have sobbed with joy if you had offered him an inflation rate of 14%, let alone 4%. But as Healey would also have told you, 4% can become 6% very quickly. Then consumers’ expectations kick in, and 6% becomes 8%. Wages leap to follow prices: 8% becomes 10%. And with interest rates following suit, good luck paying your mortgage.

Today, you probably have to be in your mid-sixties to remember what inflation really meant. For everybody else it’s just a word, a vague economic term from a vanished age, like the gold standard or the balance of payments deficit. But if you were of working age in mid-1970s Britain, inflation mattered. It ate into your savings, your living standards, your pension. If you belonged to a powerful trade union, which could fight for an annual pay rise on your behalf, you might be all right. But what if you didn’t?

Then as now, the causes were very complicated. Traumatised by memories of the Great Depression, desperate to avoid an economic slowdown that might revive the spectre of high unemployment, Britain’s politicians had tolerated a relatively high inflation rate for years. Slowly, inexorably it began to creep up: 6% in 1970, 9% in 1971, 7% in 1972, 9% again in 1973…

And then on 6 October 1973, the Jewish holiday of Yom Kippur, Egypt and Syria launched a sensational surprise attack on Israel. The Israelis fought back, boosted by more than 22,000 tons of American tanks, weapons and military supplies. Ten days after the start of the war, the Arab oil exporters unleashed their “oil weapon”, slashing production, raising prices by 17% and announcing an embargo on exports to the United States, the Netherlands, Portugal, South Africa and Rhodesia. And with that, energy prices went through the roof.

In Britain, where Ted Heath was already struggling to keep inflation down, the political consequences were catastrophic. When the nation’s miners walked out for the second time in two years, Heath instituted a three-day working week and called a snap election. But the result was a hung parliament, and in came Labour’s Harold Wilson to form a minority government and prime the pump for a second election.

Every other Western country tried to deflate its economy to deal with the oil shock, but not Harold Wilson’s Britain. By the spring of 1975, prices were rising five times (yes, five times) faster than in any other major European country. In 12 months, the price of sugar had gone up by 184%, carrots by 137%, electricity by 66%, tinned soup by 54%, orange squash by 51% and coal by 47%.

Today some of the details of that summer of 1975 seem almost deranged. To cut down on paper costs, publishers started producing shorter books with smaller typefaces. They gave up printing the prices on the back, using sticky labels instead. Meanwhile the trade union leaders were endlessly trooping into Downing Street, asking for new deals for their members. On 3 April the power workers won 31%; on 14 April the civil servants accepted 32%; on 18 April the doctors won 35%; on 29 April London’s dockers settled for 30%.

The extraordinary thing is that most of the union leaders themselves, who knew more about the world of work than many politicians, told Wilson’s ministers that the whole business was completely bonkers. Yet it was their job to keep asking for more. That was what their members expected. So they did.

Perhaps this makes inflation sound like a joke. It wasn’t. The costs fell most heavily on people who could ill afford it — the poorest, the elderly, those living alone — their incomes stagnant as prices rocketed. As Britain’s GDP fell two years in a row, living standards sank with it. By December 1977, the average couple took home less money, in real terms, than they had four years earlier.

It’s worth repeating that although every major Western country suffered from the ravages of inflation in the mid-Seventies, none suffered as badly as Britain. That was a political choice, not an act of God, and people knew it.

They knew it at home: Wilson’s Foreign Secretary, James Callaghan, told his colleagues he often thought that, if he were a younger man, he would emigrate. And more embarrassingly, they knew it abroad. “Britain is a tragedy,’ the US Secretary of State, Henry Kissinger, told President Gerald Ford in a conversation captured by White House transcribers. “It has sunk to begging, borrowing, stealing until North Sea oil comes in … That Britain has become such a scrounger is a disgrace.”

So how did they fix it? The short answer is: with great difficulty.

One of the poisonous things about inflation is that it corrodes the social fabric, driving a wedge between savers and borrowers, old and young, those represented by trade unions and those dependent on fixed incomes. Labour’s answer was the Social Contract: in very basic terms, a programme of rolling incentives (better pensions, bargaining rights and so on) to persuade the unions to accept progressively smaller pay increases.

On paper it was a pretty good idea. Slowly but surely, they would wring inflation out of the system, without the shock of harsher medicine. The only problem was that it didn’t work. By the end of 1978, Wilson’s replacement, Callaghan, had got inflation down to just under 10%. Now he demanded one more heave, a 5% pay limit that would push inflation down even further in time for the next election. But it was too much.

Instead of dampening wage pressures, the Social Contract had simply stoked the flames. Workers — especially the lowest-paid — were sick of stagnant living standards, and now their impatience boiled over. That winter, defying the government’s entreaties, millions walked out, unleashing the most devastating industrial unrest since the General Strike of 1926. Bin bags in the streets, the dead going unburied: you know the rest.

A few months later, Britain voted for Margaret Thatcher, and her answer was rather different. Gone was Mr Nice Guy, in came Nurse Ratched, determined to squeeze inflation out of the system by any means necessary. Interest rates went up, and up, and up, peaking at a truly excruciating 17% at the end of 1979.

The irony is that Mrs Thatcher loathed high interest rates, which penalised her beloved middle-class homeowners. But that’s the cruel thing about inflation: to tolerate it is bad enough, but to bring it down can feel even worse. To put it another way, lower prices — or at least, prices that are rising more slowly — come at a cost, and in the mid-Eighties the bill came to some 4 million jobs.

Was there an alternative? Well, even many of Mrs Thatcher’s own confidants thought they should have squeezed more slowly. But would it have been pain-free? No. With inflation, there’s always pain. So what are the lessons? The obvious one is boringly simple: for God’s sake, don’t let inflation creep into your system. But as Boris Johnson’s government may well find, that’s easier said than done.

The global supply chain crisis, the growing pressure on limited energy resources, the extraordinary circumstances of post-pandemic recovery and even the unanticipated consequences of Brexit are probably beyond the direct control of any national government, even the most competent. And as Ted Heath learned in 1973, a globalised economy makes you vulnerable. A butterfly flaps its wings in the Amazon, and a woman in Wolverhampton sees another chunk disappear from her savings.

So if inflation does set in, then what? Again, I suspect the answer’s boringly simple. You can try to live with it — indeed, some economists argue that a period of high inflation might be a good way of driving down our post-pandemic debt — but the risk is that 5% becomes 10%, 10% becomes 20%, and then it’s 1975 all over again and the International Monetary Fund would like a word.

Or you can try to manage it with incomes policies. But does anybody think British workers in the 2020s will readily accept government-mandated pay curbs? I don’t much fancy seeing the pavement turned into a Winter of Discontent theme park, sorry.

So that just leaves the only likely solution: ever higher interest rates, a wave of house repossessions and a government-induced recession to deflate the economy. Harsh medicine from a determined doctor, basically. Years of pain.

And can you see Boris Johnson doing that? Me neither.

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