Reader TTS

The ruling Conservative Party loses two by-elections, rail workers go on strike, taxes are hiked. As the UK comes to the defence of an invaded underdog, the price of oil increases, causing

inflation to exceed 9%. The year is 1973. There are important differences between now and then, of course. Back then the UK had just joined the European Economic Community (as the EU was

then called), a pound bought you two-and-a-half dollars, and high energy prices were the result of an OPEC embargo, rather than a boycott of Russian oil and gas. However, the similarities

have been broadly noted. A key question is whether inflation will follow a mid-1970s path and head towards 15, 20 or even 25 per cent — as it did then. The answer is that such runaway

inflation is unlikely, unless we see wage growth start to exceed price growth significantly, as happened in the mid-1970s under Labour. In 1973 retail price inflation was 9.2%, but wage

growth was 15.3%. This was followed in the next two years with inflation rates of 16% and 24%, but wage growth that exceeded 18% and 29% respectively. It was a classic wage-price spiral.

This time round wages are not keeping up with inflation, at least not yet. According to the ONS, in the year to April real wages declined 1.2%, the worst showing since the fourth quarter of

2013. Wages may not be keeping up with inflation, but we have still experienced year-on-year price increases of 9.1 per cent, as robust post-pandemic demand has met supply levels constrained

by Covid — including a zero-Covid policy in China — and more recently a major war in Europe. While it is impossible to forecast with any confidence how Covid, or Russia’s war in Ukraine,

will evolve, there is reason to believe that the impact of the mismatch in supply and demand will continue, at least for a while longer. Driven by food prices, UK producer prices last month

were 15.7% higher than a year ago. These producer prices are a leading indicator of prices-in-the-shop six months down the line. If high price inflation is likely to prove sticky through the

remainder of the year, what can we reasonably expect for growth? Unfortunately, persistently high inflation will likely coincide with sluggish growth in what some commentators are calling

an anti-Goldilocks scenario. For many years we had growth that was positive, but not so positive as to ignite inflation, and things were said to be like Goldilocks’s porridge: neither too

hot nor too cold. Now, however, we are faced with inflation that is running far too hot, and growth which is cooling. The problem the Bank of England faces is that while inflation is being

warmed by higher food and energy prices, there is not much it can do about it, at least in the short term. In the medium term, of course, the Bank can get prices down, but it will require

them to destroy demand by letting growth cool, which will not be pleasant. No active central banker is going to go on record saying that the aim is to bring about a recession. Testifying to

Congress this week, the Federal Reserve Chair, Jerome Powell, said he was “not trying to provoke” a recession. By contrast, the ex-New York Fed Chair Bill Dudley clearly felt less

constrained when he wrote in a Bloomberg opinion piece: “If you’re still holding out hope that the Federal Reserve will be able to engineer a soft landing in the US economy, abandon it. A

recession is inevitable within the next 12 to 18 months.” Dudley’s old employer, the New York Fed, recently updated its forecasts, reducing US GDP growth from positive to negative this year

and next. In the UK, the Bank of England is forecasting growth to be negative in the fourth quarter of this year, stating in its most recent Monetary Policy Report that “global inflationary

pressures have intensified sharply following Russia’s invasion of Ukraine. This has led to a material deterioration in the outlook for world and UK growth.” The good news is that we are not

likely to see a repeat of mid-1970s wage-price-spiral inflation. The bad news is that preventing a back-to-the-future scenario requires “operation demand destruction”. With wage growth

lagging the growth in prices, people will get poorer and, as they run through any savings they have left over from the fiscal handouts of the pandemic, they will be forced to cut spending.

According to the ONS, retail sales fell in May as shoppers cut back on food spending amid plummeting consumer confidence. Lower consumer spending will lead to higher unemployment and the

economy will go into a recession. This will enable disinflation to take root as price increases moderate. We may even see a period of deflation before this cycle ends. Whether or not we can

get back to a Goldilocks era, with growth conditions neither too hot nor too cold, but just right, remains to be seen. A MESSAGE FROM THEARTICLE _We are the only publication that’s committed

to covering every angle. We have an important contribution to make, one that’s needed now more than ever, and we need your help to continue publishing throughout the pandemic. So please,

make a donation._