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Does the return of inflation in the advanced industrial countries show that the lessons of the 1970s still need to be learned?
This was a question on the All Souls Oxford University Prize Fellowship Exam Paper. The best minds were asked to answer it. Here's my take:
On the one hand, it can be argued that the recent increase in inflation is a result of macroeconomic policy decisions made in the aftermath of the 2008 financial crisis, such as quantitative easing and low-interest rates.
These policies were implemented to stimulate economic growth and prevent deflation but they also carry inflationary risks. Therefore, the recent inflationary pressures are not the result of a failure to learn from the 1970s but rather an unintended consequence of policy decisions that address a different set of economic challenges.
On the other hand, policymakers still need to learn from the lessons of the 1970s in managing inflationary pressures.
In the 1970s, inflation was driven mainly by external factors such as oil price shocks, but it was also exacerbated by government policies that fueled inflationary expectations and wage-price spirals.
While the current inflationary pressures may have different drivers, such as supply chain disruptions caused by the COVID-19 pandemic, the response of policymakers has been to primarily focus on short-term measures, such as stimulus packages and wage subsidies, rather than addressing the root causes of inflation.
Furthermore, the persistence of inflationary pressures suggests that policymakers still need to fully internalize the lessons of the 1970s, which highlighted the dangers of allowing inflation to become entrenched and the importance of credibility in central bank policy.
In this sense, the recent return of inflation indicates a failure to learn from past mistakes thoroughly.
Alpesh Patel OBE
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