I'm a child of the 1970's. 1971 in fact and to be fair the inflation that plagued the UK through that particular period is something that is recounted to me by my father, usually dovetailed with grumbles about a 3 day week, blackouts, unions, Red Robbo and how at the end of the 1970's Mrs Thatcher for a brief period rekindled the UK and arguably became the most powerful person in the world.
Of course the 1970s were a period of great turbulence within the UK. The early years of the 1970s were a period of rapid economic growth. The Bank of England deregulated the mortgage market - meaning High Street Banks could now lend mortgages (not just local building societies). This helped fuel a rise in house prices and consumer wealth. The 1972 budget saw chancellor Anthony Barber make large tax cuts against a backdrop of high economic growth and there was the growth of credit.
By 1973, inflation in the UK was accelerating due to:
- Rising wages, partly due to strength of unions.
- The inflationary budget of 1972.
- Growth in credit and consumer spending.
- Oil price shock of 1973, leading to 70% increase in oil prices.
Belatedly, the government tried to deal with unemployment, through higher interest rates. Also, the Heath government tried capping wages. This was fuel for industrial unrest, leading to frequent and widespread strikes. In 1973, the miners went on strike and were also joined by sympathetic trades unionists. The 1973 oil crisis saw the price of petrol more than double and the UK faced an energy crisis to go along with a spike in inflation. The government seemed powerless as Britain was put on a three day week and TV was turned off at 10.30pm.
Against this backdrop the 1970s was a period of rapid house price growth, especially in the early 1970s. During the 1970s, home ownership rates increased from 51%, 1970 to 57% in 1981.
In 1970 Q1, average house prices were £4,377
By 1973 Q1, average house prices had more than doubled to £8,395
Real house prices rose in the early 1970s because:
- Rise in incomes
- MIRAS - tax relief on mortgages, encouraged people to get a mortgage.
- Deregulation of mortgage sector
- Greater aspiration to own a home
In the second half of the 1970s, real house prices fell between 1975 to 77 because they struggled to keep up with record inflation.
When people talk inflation it is usually this 1970s version that allows men and women of a certain age to look into the middle distance in terror. Hard to believe therefore that most of a younger generation have never lived through a period of significant rising inflation as since the early 1990s CPI has been kept largely at around 2%.
So why the sudden refocus upon inflation over recent weeks? Well the US 10 year treasury yield has been pushing up towards 1.6% [from around 80bps at the end of 2020] and that is seen as a canary in the mine for inflation expectations. Bond investors fear the US central bank will let inflation increase more than normal, eroding the value in bonds.[remember bond price down, yield up]. Market speculation that the U.S. Federal Reserve will allow consumer prices to overshoot have pushed 10-year inflation expectations to their highest since 2014, with the Treasury Inflation-Protected Securities breakeven inflation rate trading higher.