Explaining Price Inflation in the UK: 1971-92

The late-1950s and 1960s were, by recent standards, a period of low and stable inflation. Since then, however, inflation has been both higher and more volatile peaking above 24 per cent in 1975 in the wake of the quadrupling in the world price of oil. As a consequence, the control of price inflation has become a central concern of macroeconomic policymakers. In the 1970s, the policy response was often to rely on sonic form of direct control of prices and earnings through incomes policies. By contrast, the Conservative administration from 1979 onwards eschewed all forms of market interference instead relying on the more explicitly macroeconomic policies of monetary control. At first, these took the form of announced targets for the broad monetary aggregates (initially £M3), but through the 1980s the specification of the Medium Term Financial Strategy (MTFS) evolved to allow a more flexible assessment of monetary conditions' which allowed a wider range of indicators to be monitored. Nevertheless, the primary aim of policy remained the control of inflation. The commitment of sterling to the exchange rate mechanism in February 1990 was a logical extension to this approach. The failure to maintain this policy is, by now, well known and the subsequent relaxation of policy in the wake of ERM departure has clearly represented a shift in emphasis away from pure inflation targeting towards a more active concern for the maintenance of output. Nevertheless, recent policy statements, in particular with the announcement of an inflation target of 1–4 per cent for the forthcoming year, have been at pains to preserve the role of the inflation objective in the overall policy framework.