Until this year, inflation in advanced economies like the US and UK had been so low for so long that you had to be very old to remember what life was like during oil price spikes. the late 1970s. It was bad. Annual consumer price inflation in the United States peaked at 13.5 percent in 1980, while in the UK it reached 24.2 percent in 1975 and, after a decline, rose again to 18 percent in 1980.
But the big numbers don’t reveal the consequences of high inflation. A reasoned economic evaluation of its costsincluding distortions that arise when soaring prices interact with the tax system, the erosion of household savings, or the effect of resulting uncertainty on investment and growth.
Economists point out that increases in the inflation rate have a redistributive effect because they hurt savers but benefit borrowers by reducing their debt in real terms. But that is cold consolation for people with large mortgages who are now facing the highest interest rates – and therefore demands on their disposable income – in recent times.
This redistributive effect makes the political response to inflation inevitably political. Here the Bank of England (BEO) has turned a deaf ear by repeatedly calling people not asking for salary increases in line with inflation. The median annual disposable income of British households is around £31,000 ($37,305) at a time when energy bills are expected to increase by more than £4,000 per year from January, up from £1,400 in October 2021, and food prices have risen almost 10 % in the last 12 months.
The unrecognized emotional burden of inflation
The BOE’s fear of a wage-price spiral is rational. But rational economic assessments ignore the emotional consequences of high inflation. This is more easily understood in the case of hyperinflation. Germany’s experience in the 1920s is widely considered to have contributed to social instability and to have had an impact on the development of economic policies that continues to this day.
But even smaller inflationary episodes like that of the 1970s leave emotional scars. I was a teenager at the time and vividly remember my mother’s palpable anxiety about being able to pay the weekly food bill. She had a cupboard where she kept tins or dry goods bought on sale, a kind of savings account to feed the family. I have a similar closet at home to this day, and I also inherited his obsession with turning off the lights and keeping the thermostat down. These habits will be very useful to my family in 2022 and 2023, but they predate the current crisis, reflecting the imprint of my mother’s fears.
Today’s inflation is well outside of recent experience. People have long thought that the prices of everyday goods such as clothing, food, appliances or housewares were more likely to fall than to rise – a sentiment perhaps more salient than price rises. prices for services such as transport and insurance. Today, however, there are reports of increased demand for food banks in both WE and the UKand more use of cash that people are trying to budget more carefully. It doesn’t matter what that says about whether the economy is in a recession; few emotions are stronger than the fear and anguish a parent feels at the thought of not being able to provide their children with food and shelter.
This non-monetary cost of soaring inflation closely follows the very different but equally heartbreaking experience of the Covid-19 pandemic. How will an economically harsh winter affect young people who have already spent the better part of two years cut off from their peers by the lockdowns and whose education has been interrupted? A deeply anxious generation is taking shape before our eyes.
Manage crises through sound policy
Recognizing the emotional costs of current inflation leads to two conclusions. The first is that the political response is more difficult – and more important – than getting the economy right. Although the advice of economists will certainly be important in trying to limit this inflationary episode, we are the act of support. Politicians might wisely opt for policies (such as budget support for struggling households or intervention in price setting) that mainstream economic orthodoxy would rule out.
Economic efficiency is not the top priority in a crisis. That is why prudent economics ministers must now be plan ration diets for certain energy and food products in case such measures are necessary (as was the case for gasoline in the United States and the United Kingdom in the mid-1970s).
The idea that free global profits, high-paying bonuses and stock buybacks can continue will soon come up against reality.
The other conclusion is that this period will probably have important social consequences. Since the late mid-1980s, the West has experienced nearly four decades of globalization, underpinned by a political philosophy that emphasized market forces while sharply distinguishing between state and economy.
The terms of social consent for businesses are fundamentally changing, due to the 2008 global financial crisis, the pandemic and now the cost of living crisis. Most politicians don’t seem to have acknowledged or expressed it yet. But the idea that free global profits, high-wage bonuses and stock buybacks can continue will soon come up against reality. The only question is what form the transition to the new consensus will take.