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What really causes inflation? Here’s what prices since 1970 tell us.
The shocking rise in the cost of living
Today we consider real inflation - not official, bogus measures - but the real cost of living 50 years ago compared to today.
I’ve spent quite a bit of time compiling the data in the table below. Please cast your eye over it. It shows the price of various items in 1970 compared to their price today.
I’ve used various different sources from across the net, from the ONS to broadsheets to blogs. I can’t list them all here (there isn’t space). The numbers are pretty sound (more details as I discuss below), though quibble-with-able.
It’s amazing just how much things have risen in price.
Average wages have gone up by 22 times, give or take, over the last 50 years. However, there have been huge deflationary forces at work, which have driven down the cost of labour.
Cheap immigrant or outsourced labour has driven down wages to an enormous extent. So have more women entering the workforce. All mean the workforce has expanded, meaning more competition for jobs, which has driven down prices. Great if you’re an employer, not so great for the employees.
In short, there is no shortage of labour supply and, for the most part, we don’t use debt to buy labour. It is usually paid out of cashflow.
If you buy it with debt, it’s gone up an awful lot
With houses, however, there is a very different story. House prices have gone up almost 70 times over the same period. If wages had gone up by as much as house prices over the period, the average salary would be around £100,000. Imagine.
Then imagine if London wages had gone up by as much as London house prices. There isn’t enough space on the page to print the required number of zeros.
The key observations about these high prices are, first, that the supply of housing, thanks to planning laws, is more limited than the supply of labour. Second, and probably more importantly, we use debt to buy houses.
New debt entering the market – newly-created money in other words – has pushed up house prices in a way that could not have happened if this was a cash market.
A similar dynamic has been at play in the car market. Cars are obviously a lot better today than they were in the 1970s, but their supply is not finite in any meaningful way, and the impact of improved productivity should have had a deflationary effect.
Yet we see the average car – a Ford Cortina in 1970, a Ford Mondeo today – is 32 times more expensive, while the luxury car that is the Range Rover is over 40 times dearer. The reason? We use finance to buy cars. Cheap debt has pushed up car prices too.
On the other hand, we don’t use finance to buy bread, milk or eggs, while the production techniques for each have dramatically improved. I don’t think battery farming even existed in 1970, certainly not like it does today, and cheap milk imports from Poland certainly didn’t exist either. So, with improved productivity, and neither debt nor limited supply to push up prices, basic, low end staple food costs have fallen relative to wages.
With sound money they would have fallen by a lot more.
This same dynamic doesn’t apply to beer costs. Why? In recent times the extra cost of serving beer in a Covid-compliant manner has driven up prices, but the main villain has been increased alcohol duty. Cost of government in other words.
The actual cost of making beer, before all the add-ons, is quite low.
The same goes for fuel. Cheap oil is much harder to produce than it was in 1970, even if oil production techniques have improved, but around 70% of the cost of petrol at the pump is the cost of government (taxes and duties).
When we look at the cost of washing machines, we see the other big factor at play. Globalisation. On the whole we don’t use finance to buy such items. They have been prone to the deflationary force of improved productivity and globalisation. Washing machine buyers benefit from China’s cheap labour and the export of its deflation. And so washing machine prices have “only” quadrupled.
The one thing that’s got cheaper – communication
And what about the cost of phone calls? Technically a one minute phone call to a landline costs 3p, but then again I can have a one hour video conference call with anyone anywhere in the world for free.
If you want to see the deflationary forces of improved technology at work, look no further than the cost of communication. Even in a world of rampant money printing it has gone to almost nothing. There’s the scalability of digital tech for you right there.
The way to benefit from this extraordinary inflation has been to own assets of which there is a finite supply, and which people use debt or cheap money (and that includes leverage) to buy. Houses, stocks, collectibles. All the stuff that’s been going up.
It wasn’t always this way - in the 19th century stuff got cheaper
It’s worth remembering that over the course of the 19th century in the UK, under a gold standard, prices fell, as the chart below illustrates. From 1816, and the end of the Napoleonic Wars, to 1900 prices more than halved.
The same century saw the most explosive real wage growth in British history.
Under a fiat standard, the story is very different. Look how prices have risen over the course of the fiat 20th century relative to other centuries. (the chart would be even higher now, but it ends in 2011).
None of this will change until the money system changes.
(A version of this article first appeared at Moneyweek.)