Or their first-degree-of-consanguinity kin, bell-bottoms.*
From Ruffer, November 19:
Investors have divided into two camps. Those who believe inflation will subside and the rise in prices will prove temporary. And others who fear we are entering a period of high sustained inflation reminiscent of the 1970s.
We consider both scenarios unlikely.
Overlay the bottom chart on the top and you would be forgiven for believing that we are now on the same trajectory as we were 50 years ago. There are parallels but to assume the economy will meet the same inflationary fate would be a grave mistake for investors.
We believe we are entering a new inflationary era. But unlike the 1970s, it won’t be marked out by shockingly high inflation rates. Instead, investors will confront a world of inflation volatility. In this environment, the gap between interest rates and headline inflation will widen – creating a dangerous chasm known as negative real yields.
Take energy prices, wages and interest rates. On first glance, the music sounds quite familiar. But closer listening reveals that we may be at a different concert altogether.
Rising energy prices were chief amongst the culprits in sparking inflation in the 1970s. And while oil and gas prices have more than doubled in the last year, the world is not likely to see the ten-fold increase in energy costs that triggered the 1970s inflation.1
Wages are less likely to spiral. The past 40 years witnessed an extraordinary expansion of the global labour market – in effect, screwing the lid tight on wage inflation. The political, technological and social forces which suppressed wages may now be dwindling, but these forces are measured in decades, not months, and so we shouldn’t expect wages to spring up from the depths. Labour market dynamics have changed. When Britain’s coal miners ended their 1972 strike by accepting a pay increase of 35%, roughly 50% of the workforce was unionised. Today that has fallen to 24%.2
Interest rates may rise – but they can only rise so far. By 1979, interest rates in the UK reached 17%.3 A year later, rates surpassed 18% in the US.4 But this time around, the firepower of central banks is limited – that is what we should be worrying about....
Retrospace Blog has some superb scans of a 1970s Flagg Bros catalogue. Take a browse through the Flared trousers, Platform shoes and super fly suits in their catalogue. As the Flagg bros say “One good thing leads to another”.
