How the inflation crisis of the 1970s finally ended

In the 1970s stubborn inflation saw interest rates raised to historic levels, leaving many homeowners with unaffordable mo

In the 1970s stubborn inflation saw interest rates raised to historic levels, leaving many homeowners with unaffordable mortgage payments – and most economists today fears rates will rise sharply again as central banks try to control soaring prices.

The decade was marked by sky-high inflation that reached beyond a staggering 25 per cent in 1975, hitting the pockets of ordinary Britons.

Raising interest rates is one of the only weapons central bankers have to fight inflation. It means the cost of borrowing is increased and households therefore tighten their belts, helping to bring rising prices under control.

And by the end of the 1970s, the Bank of England base rate – which was then set by ministers because the institution was only made independent from government in 1997 – had risen to 17 per cent, leading to huge mortgage repayments and a paralysed housing market.

Then, the inflation crisis had been caused by workers’ wages rising faster than the UK economy was growing thanks to militant trade unions – and at the same time the price of oil soared as Arab nations constricted supplies over the West’s backing for Israel in the Yom Kippur War.

Today prices are soaring thanks to the huge amounts of money in Britons’ savings after two years of lockdowns and government handouts. At the same time the war in Ukraine has pushed oil and food prices up.

Headlines from the Daily Mail in 1979 reveal the extent of the inflation crisis that then existed, with one warning of a ‘bleak winter outlook’ as mortgage repayment rates of 15 per cent loomed.

The costs of electricity, groceries and food all rose by nearly 300 per cent between 1970 and 1979, whilst denim jeans went from costing £2.50 to £15. The price of a new Mini went from £595 in 1970 to around £2,400 in 1979.

The price rises were ultimately halted after the election of Mrs Thatcher in 1979 and her decision to raise interest rates and impose public spending cuts.

Whilst inflation was tamed – because the rise in interest rates meant people had less money to spend due to higher borrowing costs  – it came at the cost of pushing the UK into recession, causing unemployment to rise beyond three million for the first time since the 1930s.

In comparison to today’s Bank of England base rate of 1 per cent, interest rates in the 1980s remained high throughout Mrs Thatcher’s time in office.

But with yesterday’s news that the UK’s inflation rate rose to nine per cent in April, the prospect of higher interest rates – which had been at historically low levels of less than 1 per cent for more than a decade before they were increased by 0.25 per cent this month – are on the horizon once again.

Speaking to MailOnline, experts said that, despite the Bank of England’s recent caution, interest rates will need to rise further, meaning mortgage costs will increase.

Chancellor Sunak warned earlier this year that mortgage prepayments could rise by more than £1,000 a year if interest rates increase as expected by 2.5 per cent over the next 12 months.

Susannah Streeter, an economist at Hargreaves Lansdown, said there ‘definitely needs to be an increase’ in rates and said there is ‘some speculation’ that they could rise to 3 per cent. She said this ‘short, sharp shock’ risked a ‘longer downturn’ where the UK could plunge firmly into recession.

Professor Simon Johnson, the former chief economist at the International Monetary Fund, said it is ‘likely’ that rates will rise, as he warned that central banks ‘have got the most difficult task they have had in 40 years’.

The economists’ comments were backed up by Martin Sorrell, who founded the world’s largest advertising group WPP. He said he sees ‘little prospect’ of inflation being tamed without the Bank of England ‘significantly increasing interest rates’.