Trying to learn from inflation/interest rates in 1970s

Amram1234

Hi everyone.

When reading about the inflation rates/interest rates I've noticed alot of the graphs on news articles only go back 10-15 years which makes the recent inflation/interest rates seem very very high.

I was looking further back and I'm drawing parallels between what is happening now and in the 1970s. I've come to some conculsions below, but wanted to check my thinking:

- if we look at the impact of the 1973 oil crisis and draw parallels on the Russia gas supply issues, these feel very comparable.

- The stucture and fundamentals of our economy are sufficiently different that it won't be a carbon copy, but there may be similarties.

- I think the impact of both having a supply and demand driven inflation are similar. The costs of electricity, groceries and food all rose by nearly 300 per cent between 1970 and 1979, whilst denim jeans went from costing £2.50 to £15. The price of a new Mini went from £595 in 1970 to around £2,400 in 1979.

- The ability for interest rates to control inflation is reduced as more people are on fixed rate mortgages and more people own their home outright.

So where I am getting to is that it is unlikely we will see inflation rates hit the 25% peak seen in th 1970's, but because the impact of interest rates rises is reduced then BoE will likely need to raise the interest rates higher to cool the economy/make people feel poorer/control inflation, so logically I think a peak interest rates of 12-15% type levels would not be unreasonable.

This would obviously cause increased unemployment, impact house prices and people feeling poorer as bills will be going up. I suspect that employers would be under pressure to increase wages, but this can only happen for so long. I feel like all the articles are saying that interest rates will be coming down in the next 12-18 months, but based on the above I'm not convinced. But I'm also feeling like I'm the only person thinking like this.

Would be great to get peoples opions/views.

A._Badger

I think the wild card in any projections about inflation (and particularly in drawing any conclusions from the 1970s) is the cost of implementing the 'Net Zero' policies which all the main parties seem bent on inflicting upon us. Short of the effects of a war I can't think of any historical precedent for an economy being so tampered with. We are in uncharted waters. 

Amram1234

A._Badger said:

I think the wild card in any projections about inflation (and particularly in drawing any conclusions from the 1970s) is the cost of implementing the 'Net Zero' policies which all the main parties seem bent on inflicting upon us. Short of the effects of a war I can't think of any historical precedent for an economy being so tampered with. We are in uncharted waters. 

Thanks - I completely agree. This is why I don't think we can predict interest rates are going down (which is what a lot of news outlets are saying), I think there is a decent chance the rates will continue to rise to 10%+ levels, but this does not seem to be the view from the media/wider reading.  

A._Badger

Amram1234 said:

A._Badger said:

I think the wild card in any projections about inflation (and particularly in drawing any conclusions from the 1970s) is the cost of implementing the 'Net Zero' policies which all the main parties seem bent on inflicting upon us. Short of the effects of a war I can't think of any historical precedent for an economy being so tampered with. We are in uncharted waters. 

Thanks - I completely agree. This is why I don't think we can predict interest rates are going down (which is what a lot of news outlets are saying), I think there is a decent chance the rates will continue to rise to 10%+ levels, but this does not seem to be the view from the media/wider reading.  

Personally, I take no notice of what the media says, particularly when it is making predictions. Anyone who could confidently predict the future would be making a great deal more money than they get by working as a hack for the BBC or the Times.

LHW99

As I understand it, its not that current interest rates are particularly high, just that rates after the financial crisis became unusually low, and persisted for a number of years, so that people adjusted their lifestyle to rely on low interest rates (PCP for cars etc). In the 1970's you tried to avoid credit as much as possible - although in those days it tended to be "Hire Purchase" which was expensive.

Altior

To the OP, many many people are making the mistake of thinking that the Bank's base rate is being used to control retail mortgage rates. It is not. One of the impacts of rate changes is that it will impact domestic mortgages, but that's not the underlying/overriding reason why that lever is being pulled. 

A financial novice may be taken in by the media and political narrative that the Bank are raising rates to make it more expensive for those with a mortgage. However, that is simply incorrect. 

littlemoney

Low interest rates have contributed to an "I want it now attitude" particularly among younger people. Saving for something, buying second hand, make do and mend approach is something many people do not consider.

 I remember the 1970s being unable to buy a house. When I was growing up I was taught to save for what I wanted. Today I still don't buy things unless I have the money.

Altior

fwiw for me there is very little correlation with the past, aside from the inevitability that high inflation would lead to high interest rates, unfortunately it took the Bank about a year to figure this out.

The legislators are boxed in by the volume of national debt, meaning we are at the tolerance level of the market, and is regularly being tested. Seemingly 'everyone' thinks 'the government' (ie taxpayers) should pay for 'everything', and there is no appetite from any mainstream political party to have a reality check on the decadent excessive spending of money that we don't have. As government still haemorrhages money everywhere. Demonstrated by serious people actually calling for mortgage bailouts! As every year passes we make it easier and easier for people of working age not to have to work. So we import more people to replace them when we don't have the state capacity to cope with the numbers we have now.  

My instinct is that headline inflation will now subside and we are approaching the end of this cycle. But 2% inflation (or lower) is a long long way off.  

Swipe

The one glimmer of hope is that the US and a number of other countries are finally looking like they may have their inflation now under control. 

Nebulous2

littlemoney said:

Low interest rates have contributed to an "I want it now attitude" particularly among younger people. Saving for something, buying second hand, make do and mend approach is something many people do not consider.

 I remember the 1970s being unable to buy a house. When I was growing up I was taught to save for what I wanted. Today I still don't buy things unless I have the money.

I think you are being unfair to young people. 

I remember my sociology lecturer saying, "the chief characteristic of the middle class is the principle of deferred gratification." He went on to say that was not the case for the working class, nor the upper class. 

That changed though - with a fair chunk of society becoming addicted to debt. As house prices rose people remortgaged their homes and withdrew cash at the same time for cars, holidays and whatever took their fancy. We have a lot of people now hitting retirement age with interest-only mortgages without a plan to repay them, and consumer debt as well. 

There's a range of approaches by young people. A lot I know are sober, sensible and hard-working. I remember our partying, turning up at work the next day struggling to cope, and I see very little of that now. 

I do see some who have opted out, believing the opportunities their parents had are not available, or if they are available they aren't worth the cost. People who get their gains elsewhere - be that surfing, swimming, climbing or travelling. That seems to cut across cultures as well, some Chinese people embracing a 'lie flat' approach. 

I also know a few who aren't very materialistic, reject the consumer society and are the polar opposite of your "I want it now" stereotype. 

This stuff is complicated, but seeing it as an intergenerational conflict doesn't help. 

Altior

I feel like that culture has been driven by social media more than cheap borrowing. Although cheap borrowing made it easier. It used to be that people wanted what their peers had, or 'keeping up with the Joneses'. Now it's keeping up with the influencers. It seems to me that so many people want material things, nice holidays, be at the right event so that they can put it on insta or whatever. It's not just young people, but I imagine young people feel pressure to have that nice house and car to show off online to demonstrate they aren't being left behind.