The Great Reversal into a higher inflation environment

THIS is not the 1970s, or so we are confidently assured by respectable economists. Granted, as we confront soaring levels of inflation, there are nuanced differences between then and now.

But the UK’s strikes in rail, mail and rubbish collection point to one overwhelming similarity — namely, that stagflation creates winners and losers. When national real income is squeezed by oil price shocks as in the 1970s or the current food and energy price shocks, rival claimants in the economy compete ferociously to reclaim lost income. A wage price spiral results.

Milton Friedman remarked that inflation is “always and everywhere a monetary phenomenon”. Clearly, money is an important component in the inflationary process. Yet strikes in the UK and the tightness of labour markets around the developed world suggest that no explanation of inflation can be complete without reference to the distributional power struggle between labour and capital.