DOMINIC SANDBROOK: Inflation is a poison that brings down governments

Warning to Boris Johnson: Inflation is a poison that brings down governments… It annihilates savings and makes a mockery of thrift and hard work, writes DOMINIC SANDBROOK

Does every cloud really have a silver lining? I’ve never believed it. Nor, judging by its latest dispatch from the front line of the cost-of-living crisis, does the Bank of England.

Almost every detail makes for utterly gloomy reading. Interest rates have just risen to their highest level since 2009. Energy costs are expected to surge by a staggering 40 per cent in the autumn.

The British economy is forecast to shrink by 0.25 per cent in 2023. And unemployment is likely to soar to almost 6 per cent before the next General Election, a higher rate than at the beginning of the Covid pandemic.

Behind all this, as you’ll know if you’ve recently visited the supermarket, filled up your car or studied your household bills, is the spectre of inflation. Over the past 12 months the rate has already hit 7 per cent, and there is worse to come.

Campaigning for the local elections, Boris Johnson was in typically bullish form, admitting that the economy faced a ¿tough patch¿ but insisting that we are in a ¿much better position to be in than we were in the 1980s

Campaigning for the local elections, Boris Johnson was in typically bullish form, admitting that the economy faced a ‘tough patch’ but insisting that we are in a ‘much better position to be in than we were in the 1980s 

By the end of this year, if the Bank’s forecasts are right, inflation will probably reach 10 per cent, its highest level since Margaret Thatcher’s first term in the early 1980s. 

And since, according to the Office for National Statistics, four out of ten people are struggling to pay their bills, I shudder to think about the consequences when the winter cold begins to bite.

Not everybody, I know, is so pessimistic. Campaigning for the local elections, Boris Johnson was in typically bullish form, admitting that the economy faced a ‘tough patch’ but insisting that we are in a ‘much better position to be in than we were in the 1980s’. The Prime Minister may well be right, but that will come as scant consolation to people struggling to meet surging food and heating costs – many of whom can’t remember what happened during the Thatcher years.

In any case, his characteristic insouciance strikes me as a very risky, not to say reckless, way to approach the scourge of inflation, arguably an even greater economic disease than mass unemployment.

Inflation is political and social poison. Not only does it destroy governments – which really ought to worry Mr Johnson – but it corrodes the solidarity between different generations and social groups. It destroys living standards and wrecks aspiration; it annihilates savings and makes a mockery of thrift and hard work.

All of this will be familiar to people who can cast their minds back to the 1970s and early 1980s, the last time double-digit inflation tore through our high streets and households. Historians still argue about the root causes. But then as now, one of the central factors was the soaring price of oil, which rose by 17 per cent after Israel’s Arab neighbours launched a surprise attack in October 1973.

Already notorious for its inability to tame the trade unions, Britain coped worse than any other Western country. When the Tories’ Edward Heath tried to implement top-down price and wage controls, his government was humiliated by the miners’ union, which went on strike to secure a hefty pay rise.

Does every cloud really have a silver lining? I¿ve never believed it. Nor, judging by its latest dispatch from the front line of the cost-of-living crisis, does the Bank of England

Does every cloud really have a silver lining? I’ve never believed it. Nor, judging by its latest dispatch from the front line of the cost-of-living crisis, does the Bank of England

Next, Labour’s Harold Wilson tried to spend his way out, desperately offering the unions pay increases of 20, 25 or 30 per cent, so their members could maintain their standard of living. The result was a total disaster.

By the spring of 1975 prices in Britain were rising five times faster than in any other major European country. In just a year, the price of sugar had gone up by 184 per cent, carrots by 137 per cent, electricity by 66 per cent and coal by 47 per cent.

Today some of the details of that summer of 1975 seem almost deranged. To cut down on paper costs, publishers started producing shorter books with smaller typefaces. They gave up printing the prices on the back, using sticky labels instead.

The burden fell most heavily on people who could ill-afford it: the poorest, the elderly, those living alone. As prices rocketed, their living standards plummeted.

Open any newspaper from the mid-Seventies, and you see countless stories about people dining on unheated baked beans so they could afford school shoes for their children. By June 1975, one estimate even suggested that 700,000 British couples were regularly going to bed hungry ‘just to keep their children fed’.

In the long run, only Mrs Thatcher’s astringent medicine, with interest rates at an excruciating 17 per cent, managed to wring inflation out of the system. 

But her cure came at a punishing cost, with some 4 million people out of work by the mid-1980s.

And it certainly wasn’t a quick fix. In 1990, her final year in office, inflation was still 8 per cent – something we often forget today.

If that all sounds pretty bleak, it’s worth remembering that things can get an awful lot bleaker. The most infamous example came in Weimar Germany in the 1920s, when the cost of war debts and reparations sent the economy into an inflationary death-spiral.

Labour¿s Harold Wilson tried to spend his way out, desperately offering the unions pay increases of 20, 25 or 30 per cent, so their members could maintain their standard of living. The result was a total disaster

Labour’s Harold Wilson tried to spend his way out, desperately offering the unions pay increases of 20, 25 or 30 per cent, so their members could maintain their standard of living. The result was a total disaster

In late 1922 a loaf of bread in Berlin cost 160 marks. A year later it cost 200,000,000,000 marks. Ten years earlier you had needed 12 marks to buy a pair of shoes. But in November 1923, you needed 32,000,000,000,000 marks.

That explains those notorious photographs of Germans using wheelbarrows to carry home their weekly wages, or lighting bonfires with piles of banknotes, because it was cheaper than newspaper.

Some of those details might sound faintly comical today, but they weren’t comical at the time. Middle-class families’ savings were wiped out overnight. The mainstream political parties, and even the democratic system itself, were deeply discredited.

And in this climate, many Germans turned to extremist groups such as the Nazis and the Communists – just as a smaller number flirted with the far Left or with the racist National Front in Britain in the mid-1970s.

So what’s the lesson? Well, there are some crucial differences.

As the Prime Minister remarked, Britain is better placed to cope now than it was then because today’s trade unions – though far from perfect – are not remotely so powerful or so militant. And our democratic system, whatever its imperfections, is surely far more robust than the Weimar Republic.

But I think Mr Johnson would be foolish to be too insouciant. When people’s living standards are threatened, they inevitably punish the Government at the ballot box. And if we’re still struggling with a cost-of-living crisis in 2024, I wouldn’t be optimistic about the Tories’ prospects.

Forget Downing Street parties. It’s energy bills and food prices that pose the greatest threat to Mr Johnson’s long-term survival.

The difficulty, though, is that there really isn’t much the Government can do. I wouldn’t be surprised to see the Bank of England raise interest rates further in the months to come. But that, of course, would have costs of its own, dampening economic activity, pushing Britain close to recession and leaving millions of families facing crippling mortgage repayments.

Some people talk of fracking, renewable energy or nuclear power as the solutions, to wean us off expensive foreign oil. But they would take far too long to alleviate most people’s pain.

As for price controls, a crowd-pleasing wheeze favoured by the Left, these almost never work. When you relax them, prices invariably skyrocket, so you’re only delaying – and indeed worsening – the inevitable.

The unpalatable truth is that some problems don’t have an easy fix. The current wave of inflation originated outside our shores, with surging demand for commodities as the world emerged from the pandemic. And then Russia’s invasion of Ukraine heaped fuel onto the bonfire, driving energy and food prices up still further.

None of this is the Government’s fault – though Mr Johnson should be more honest about the sheer difficulty of the challenge. But that, of course, would run counter to a very different kind of inflation, namely our inflated expectations of what governments can do.

Listen to Labour’s Keir Starmer, and you might imagine that with a wave of his magic wand he could solve the cost-of-living crisis overnight. But this is utterly dishonest.

Although few of us want to admit it, the truth is that every government in the Western world is facing precisely the same challenge. None has a neat or immediate answer.

In reality, brutal as it sounds, the best way to deal with soaring prices is simply to tighten your belt and stick it out. But for understandable reasons, nobody wants to hear it.

We have become used to a world in which prices barely rose at all, a never-never land in which interest rates were so tiny they barely even registered.

But that world has gone, and may never return. As I say, sometimes there are no silver linings.