Peter Sharkey: Stagflation and the lessions of the Seventies.

Paraphrased in glazed retrospect by rock stars looking slightly worse for wear as a consequence of prolonged drug use, the famous line that if you can remember the sixties then you weren't there is today being tweaked by economists, hardly renowned for their consumption of illegal substances, and applied to the seventies.

Nowadays, it applies to inflation, an even more sinister and caustic force than heavy-duty weed and acid was a decade earlier.

Until the 1970s, most economists believed there was a stable relationship between inflation and unemployment. Indeed, inflation became a tolerable by-product of growth as economic theory stated this meant the economy was expanding and consumer demand rising.

According to received wisdom, if economic growth stalled, so unemployment would rise but inflation would fall. In order to stoke economic growth, therefore, it was essential for central banks to increase the money supply, so driving up prices and, theoretically, demand.

It was left to Milton Friedman (and his wife, Rose) to dismantle this theory.


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'Print more money,' they said. 'and you're making an inflationary rod for your own back.'

Fast-forward forty years and examine our current situation.

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Today's inflation is caused partly by 'quantitative easing', ie printing too much money and by a corresponding rise in the price of imported goods in particular. However, unemployment is also rising as interest rates remain at historically low levels and economic growth is non-existent.

We're about to enter a period of prolonged stagflation last seen in the mid-seventies, but how does this impact upon savers and investors?

It actually affects anyone who owns a house, irrespective of whether they're day trading or simply saving to buy some Premium Bonds.

Most of us look knowingly at figures reporting house price movement. In many cases, the prevailing attitude amongst home owners is 'well, if we sold it tomorrow, we would get x percent more than we paid for it', which in most instances is correct. However, this ignores the gnawing impact of inflation.

According to research published by LSL Property Services, house prices rose by 11pc between 2006-11. On a home bought for �250,000 in 2006, this equates with capital growth of �27,500. However, inflation over the same period was 17pc which means that unless our theoretical property had risen in value by �42,500, then its real worth has fallen by �15,000.

The problem is about to become more acute as the National Institute of Economic and Social Research tells us that property values will fall by 4.5pc this year and by 10.5pc by the end of 2015.

Should this situation persist, those people who believe they have bags of equity in their homes which they plan using to partially fund their retirement may be in for an almighty shock.

The bad news is that their anticipated buying power is evaporating faster than the words of a tough-talking politician following the widespread rioting and looting, a sobering thought which adds even further appeal to index-linked investments.

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