This article is taken from the April 2022 issue of The Critic. To get the full magazine why not subscribe? Right now we’re offering five issues for just £10.

Double-digit inflation is now inevitable this year in the United States; it is also very likely in most European nations, including the United Kingdom. In the twelve months to January the increase in consumer prices was 7.5 per cent in the USA, 5.1 per cent in the Eurozone and 5.5 per cent in the UK. Even before Russia’s invasion of Ukraine, the forecasting consensus was that these numbers would rise sharply in the early months of 2022 because of price increases already in the pipeline. 

Now, as sanctions on Russia become effective and the supply of wheat from Ukraine is disrupted, further and yet larger increases in energy and food prices are in prospect. For example, in the UK price caps on retail gas and electricity were raised by Ofgem on 1 April, reflecting huge upward movements in wholesale prices. 

Last November the Bank of England expected in its Monetary Policy Report that retail gas prices would increase by around 35 per cent and electricity prices by around 20 per cent, but the latest geopolitical turmoil argues for even higher numbers.

Similar developments are to be envisaged in all the world’s nations. When asked in future about the causes of 2022’s dreadful inflation figures, many participants in the debate on economic policy will be tempted to give the answer, “Ukraine”. The drama and horror of recent events in that country are so compelling that the one word may persuade without further ado. This would echo a widely-accepted explanation for the inflation of the 1970s. 

A familiar narrative interprets the quadrupling of oil prices in late 1973 and early 1974, when the Organization of the Petroleum Exporting Countries (OPEC) flexed its market power for the first time, as the principal influence on the surge in UK inflation to over 27 per cent in summer 1975. 

Plainly, if the price of an important component of a consumer price index goes up four times, a big effect on the overall increase in that price index is unavoidable. No one disputes that. But there is much more to say. 

The truth is that movements in major price indices reflect a mixture of increases and decreases. It is possible for the effect of an increase in oil prices on consumer prices to be offset by the effect of decreases in the prices of everything else. 

Just as the entire world is being hit at present by a leap in oil and gas prices, so in 1974 and 1975 all nations (apart from the oil exporters themselves) suffered from the surge in oil and gas prices due to the OPEC embargo.

Central banks are currently blaming everyone except themselves

But inflation rates differed dramatically between nations. In the UK the three years 1973, 1974 and 1975 saw increases in consumer prices of 9.2 per cent, 16.0 per cent and 24.2 per cent respectively; in West Germany (as it then was) the three years reported increases in consumer prices of 7.0 per cent, 7.0 per cent and 5.9 per cent. Germany had the same shock as the UK from the jump in the price of internationally-traded oil, but its price level as a whole was affected much less. 

The obvious question arises, “why was Germany so much more successful?” The point was that Germany and Britain had had contrasting monetary experiences in the twentieth century. The dominant folk memory of Germany’s economists was the Weimar hyperinflation of 1923, while that of Britain’s economists was the unemployment of the 1930s. 

The majority of German economists believed that inflation was due to excessive growth of the quantity of money and should be checked by control over the quantity of money, whereas most of their British counterparts believed in price and wage controls, even if that meant the government had to cuddle up to the trade unions. 

Germany kept money growth down; in the UK the Bank of England allowed the annual rate of money growth to exceed 25 per cent. The resulting divergence in inflation rates was one reason for the rise of monetarism, which led to the sound money emphases of the Thatcher government in its early years. 

Today, it remains vital to follow trends in the quantity of money. Monitoring these trends enables the pattern of inflation, between nations and across time, to be understood. Central banks are at present blaming anyone but themselves for the upturn in inflation, with President Putin as an international hate figure and a convenient scapegoat. 

But two facts cannot be escaped. First, upward pressures on inflation were evident a year ago, well before the Ukraine tragedy reached the headlines. 

Second, the USA has faster inflation than Europe because it has indulged in higher and more irresponsible money growth, and Europe has faster inflation than Japan because its money growth also has been excessive and well ahead of Japan’s. 

Invoking “Ukraine” as the principal cause of 2022’s inflation is wrong, just as blaming it all on “OPEC” or “the trade unions” was wrong in the 1970s.