“Inflation/no chance/to increase/finance,” sang Marvin Gaye in the 1971 classic Inner City Blues, a howl of anguish about life in the US at the time. As well as climbing crime rates and inequality, Americans were struggling with soaring inflation. Sound familiar?
UK inflation has once again blown through forecasts, undermining the Bank of England’s argument that price rises will be temporary. Today’s data on price rises will only increase fears that the world is heading back to the 1970s, causing pain for businesses and workers alike.
Andrew Bailey & Co have consistently argued that inflation is “transitory”, driven by factors like a shipping cost crunch and distortions from pandemic-era innovations like furlough. Today’s data is admittedly skewed by Eat Out to Help Out, which temporarily lowered restaurant prices last year and now makes increases look comically large.
But nerves should be jangling on Threadneedle Street. Big employers like Costa and Wagamama are increasing wages as companies seek to fill a record 1.1 million vacancies. Retailers and supermarkets are dangling £1,000 signing-on bonuses for truckers. High pay and bonuses will be more persistent than fluctuations in shipping costs. That risks keeping inflation elevated for longer.
The spectre at the feast is stagflation — stagnant growth and spiraling inflation. That really would be a return to the 1970s. Worryingly, the UK’s economic recovery is already hitting the skids and tax rises coming in next April won’t help.
Stagflation could force the Bank of England’s hand and provoke rate rises sooner than they’d like to curb inflation. Such shock therapy - as famously practiced by Paul Volker in the US at the tail end of the 1970s - would be tough for average working people. But so would continued sky-high inflation.
To quote Gaye again: “Make me want to holler/The way they do my life/This ain’t livin’, this ain’t livin’.”
Data over the next few months will be crucial. It’s squeaky bum time for the Bank of England.