A study by the British Central Bank: The price index in the Kingdom has increased by about 67 times since 1694 until the era of the digital economy

Date: 11 - 03 - 2021

Prices have risen at a greater rate in the past 50 years than in any similar period since the creation of the Central Bank of Britain.

A study prepared by Helen MacFarlane and Paul Mortimer Lee from the Department of Economics at the Bank of England examined the 300-year history of inflation in the United Kingdom, and how did inflationary thinking develop during that period?

The study showed that, at best, prices have risen by about 67 times since the bank’s founding in 1694, and until this time, which is known as the era of the digital economy. of the tendency to rise or fall continuously, while the study confirmed that prices rose at a greater rate in the past fifty years than any similar period since 1694; The price index also tripled between 1694 and 1948, but has since risen nearly 20 times.

A graph showing the evolution of inflation rates during previous periods of time

The study pointed to the rise in prices in several sectors, for example, the cost of construction, which rose over that period. The inauguration of the old Threadneedle Street building for the bank cost about 13,153 pounds when completed in 1734; While the current building cost around £5.3 million to build in 1939, residential property prices rose sharply in both nominal and real terms in the post-war period, as the following chart shows:

She added that in the current century, inflation was high during the First World War – prices rose by more than 100% – while production fell, and despite the significant rise in prices, which exceeded those in the United States, the United Kingdom was determined to return to the gold standard. at parity before the war, which it did in 1925, which led to a long period of deflation even before the onset of the Depression in 1929-30.

The Second World War also led to an increase in prices, but it was not very large, an increase of about 30%, and the difference was partly as rationing contributed to a positive impact on containing the measured increases in prices, and there was no sharp increase in prices once The end of the war, partly because rationing continued for several years, and also due to an increase in civilian employment that led to a growth in the supply of goods and services, according to the study.

She noted that there are a number of factors that explain why previous periods of inflation were usually temporary and later reversed. One of them was the source of inflationary momentum. High prices were often the result of temporary disturbances, such as wars or crop failures. Decreased excess demand for goods in terms of money.

The study indicated that the close interdependence of different economies due to the use of the gold standard was another factor. Where the increase in relative prices in a country tends to produce an influx of gold from that country, which implies a monetary contraction that helped stabilize prices, in addition to the role and behavior of the different public sector, where the sharp increase in the level of government debt that accompanied the war was transient in many Sometimes, a significant decrease in spending followed once the war ended. After 1814, for example, government spending fell from about 30% of GDP to about 10%.

The study concluded that during the first 300 years of the Bank of England’s history, a variety of factors were seen as contributing to the inflation process, with some blaming inflation in the 1970s on the decimal point system in 1971 – the value of the smallest currency increased by 2.4 times Over time, prices have changed, and a number of solutions have been proposed to deal with or avoid inflation. These solutions varied between traditional monetary constraints (ie increasing interest rates) and price and wage controls to varying degrees

In severity, however, it appears that some periods of wage expansion and price restraint had a short-term effect on inflation (eg wage restriction in 1972-73), while restraint often relied on behavior on the part of employees and firms that did not. serves their individual interests; In addition, it has often encouraged governments to pursue more inflationary macroeconomic policies – and for the most part – these periods have often been followed by “catch-up” periods, in which prices are readjusted to macroeconomic fundamentals.

As the study showed, extra-domestic factors have regularly been blamed for increasing inflation – something that is not always well-founded – however, the above graph can be interpreted as indicating a degree of contagion in inflation between countries. To be sure, the United Kingdom was not alone in the face of much faster inflation in the post-war period; The same was seen in other major countries, although the United States did slightly better than the United Kingdom in both 1885-38 and 1950-93. Inflation performance in Germany outperformed the United States in the postwar period. But in terms of earnings, things were a little different, with the US consistently showing lower average growth.

The study confirmed that shocks that affect prices can arise from several sources, whether they lead to inflation or not, rather than a change in relative prices, but there is no change in the total price level depends on monetary policy, as inflation is a monetary phenomenon, and it is reflected Money gradually loses value in terms of goods and services, so money growth in excess of growth in real economic activity can occur without causing inflation, provided that the velocity of money circulation (the ratio of nominal national income to money stock) decreases. However, there were almost no cases where inflation was not associated with an increase in the money supply; Which is evident in the following chart for the years since 1920.