How much does the present inflation look like the 1970s and 1980s?

Has history repeated itself?

Plenty of people are talking about stagflation these days. The fact that Q1 GDP data for the US was negative at the same time inflation was over 8% has many people worried.

In this short piece I want to look at how similar the present inflation is to the inflation experienced in the 1970s and 1980s. To do so I am going to look at the UK data.

First of all, what drove the inflation in that period? In the chart below we have taken the CPI basket weights from the period and used them to adjust the various components. This shows us what drove the inflation.

As we can see, food and non-alcoholic beverages was the biggest driver. Transport, alcohol and tobacco and restaraunts and hotels also had some impact.

What about today? The chart below shows the latest UK CPI numbers by weighted component.

Here we see a somewhat different picture. Food and non-alcoholic beverages is not playing an outsized role. Its mainly transport and housing and household services. This gives us a hint that this might be an energy-driven inflation.

But what is this is an illusion driven by the weights. The weights today are very different to those in the 1970s and 1980s. It may be that there is plenty of food inflation, but this is being covered up by reweighting.

To try to detect this I am going to do is take the latest CPI numbers from the UK and weight them by three different weighting arrangements: 2022, 1988 and 1973. Here are the results.

There it is. If we use the weights from the early-1970s food and non-alcoholic beverages go from contributing 0.8% to April CPI to 1.8%. Using the weights of the early-1970s, food and non-alcoholic beverages then contribute around the same amount as transport.

This raises the question: are these reweightings realistic in capturing how price impacts hit consumers? I have no answer to that. But personally, I have noticed my food bill chip away at my budget. Maybe not as much as energy. But I’m certainly open to the argument that the reweightings are underestimating consumer pain in 2022.

Finally, as a matter of interest, what rate of inflation would we have in April 2022 if we used the old weights. The chart below shows this.

CPI would be 9.5% as opposed to 9% if we used the weights from the early-1970s. So, all-in-all, it wouldn’t make an enormous difference to the overall CPI number. But that may change if food prices start accelerating. Worth keeping in mind when watching the numbers in the coming months.