Are we headed back to the economic chaos of the 1970s? With soaring commodity prices and the prospect of very high, if not double-digit inflation, you can see why investors are nervous.
Economists, including those at central banks, have been offering reassurance. Testifying to the UK Treasury select committee in November last year, the governor of the Bank of England Andrew Bailey said: “We are a very long way away from the 1970s.”
The economic community points to two structural changes that have happened in the UK economy. The first is the de-unionisation of the labour market. Back in the 1970s, when headline inflation spiked, unions pushed for higher pay under the threat of strike action. The increase in inflation due to oil prices fed quickly into higher wages. Companies’ costs rose further, forcing them to raise prices yet again.