Inflation: What happened the last time the cost of living was rising this rapidly?

The cost of living is rising quicker than has been normal in the last few decades. Indeed, the last time inflation was this high was in the 1980s. So, what happened then compared to now? Read on to find out.

According to the Office for National Statistics (ONS), inflation in the 12 months to June 2022 was 9.1%. As a result, the cost of living is creeping up, from your household bills to days out. The Bank of England (BoE) expects inflation to reach 11% this year before it begins to fall.

There are several key reasons why inflation is high right now. The effects of the pandemic and related lockdowns have caused the price of some items and raw materials to rise. The war in Ukraine has exacerbated this, most notably increasing energy and food prices.

While ONS data shows that average wages are rising, they haven’t kept pace with inflation. As a result, household budgets need to stretch further to accommodate rising prices and there are concerns that families tightening their belts could affect the economy.

While this will be a challenge for many, older generations may remember much higher rates of inflation.

Inflation exceeded 20% in the 1970s

While the last time inflation and the cost of living was as high as it is now was in the 1980s, the roots of the issue go back further.

In the mid-1970s, the inflation rate reached more than 20%. As now, rising energy prices played a significant role after oil producers increased prices sharply. This led to the cost of living soaring.

In addition, union demands and rising wages in turn led to companies facing higher costs and increasing their own prices. So, while wages increased, household outgoings did too. The prices of some essential goods, such as sugar and carrots, more than doubled in just a year.

The situation led to prime minister Edward Heath declaring a three-day working week as strikes by coal miners led to a drastic energy shortage.

The result of this economic situation was a period of stagflation. This is where the economy is experiencing high levels of inflation and a stagnant economy.

It was against this backdrop that Margret Thatcher became prime minister in 1979. She was voted in just after the “winter of discontent” that saw supply chains grind to a halt. One of her promises as leader of the Conservative party was to tackle the rampant levels of inflation.

Interest rates of 17% and curbs to public spending were used to control inflation

Just months after Thatcher became prime minister, interest rates increased. They reached a high of 17% that many people will remember well. The rising interest rates aimed to reduce consumer spending, but it placed huge pressure on people with debt, including mortgages.

Increasing interest rates is something the BoE has done in response to inflation in 2022, although not to the same levels.

Since the start of the year, the BoE has increased its interest rate four times. After more than a decade of very low interest rates, the base rate is now 1.25% and expected to gradually rise in an attempt to curb inflation.

In addition to higher interest rates, Thatcher’s government reduced the power of trade unions, lowered Income Tax rates, and cut public spending in a bid to control inflation. It was also a time when public services were privatised to reduce spending further, with the likes of British Telecom and British Airways being sold during this period.

While the policies were controversial and divisive, by the mid-1980s, inflation had fallen below 5%.

However, it came at a cost. The country was in a deep recession in 1980 and 1981. Unemployment was also high; it reached 10%, with those working in the manufacturing sector being particularly affected. The high levels of unemployment didn’t fall back to normal levels until the end of the decade.

What does high inflation and cost of living mean for your plans?

It’s unlikely we’ll see the high levels of inflation and economic policy that happened in the 1970s, as the situation today is very different.

However, it’s natural to be worried about how the current circumstances may affect your long-term plans and goals. The government has already taken some measures to support the economy while inflation is high and chancellor Rishi Sunak is expected to make announcements during the Autumn Budget in October.

Keeping track of the changes and what they mean for you can be difficult, but we’re here to help ensure that your financial plan continues to reflect your priorities and the current circumstances.

If you’d like to review your finances or create a long-term plan, please contact us.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.