For the past year, politicians and policymakers have watched the rising inflation on both sides of the Atlantic with growing disquiet. Rapidly increasing prices are the unavoidable result of the pandemic, they have said, before adding that at least the situation is nothing like the disastrous inflation of the 1970s.
They need to have a closer look at the evidence. Consumer price inflation in March hit a fresh 40-year high of 8.5 per cent in the US this week and a 30-year high of 7 per cent in the UK. It has two main causes, and bears many similarities to the first oil shock of late 1973, when Opec states enforced an oil embargo against countries supporting Israel in the Yom Kippur war.
Then, as now, both the US and UK labour markets were showing signs of excess demand. America’s unemployment rate fell to 3.6 per cent in March, only one-tenth of a percentage point higher than its lowest rate in over 50 years, allowing employees to bid up wages to an annual increase of 5.6 per cent. In the UK, the latest labour market figures this week showed an unemployment rate of 3.8 per cent, the lowest since 1973, an all-time record for the number of job vacancies. Total pay rose annually by 5.4 per cent.