Inflation in the UK

A short history of inflation in the UK

The Oil Shock Inflation (1973 to 1982)

British inflation reached 26.9% in the year to August 1975. The trigger was the oil embargo of October 1973, which roughly quadrupled the price of crude, but the reason it went further in Britain than in most comparable economies was domestic. Pay was indexed to prices in practice if not always in law, so each rise in prices produced a rise in wages, which produced the next rise in prices. A second oil shock took inflation back to 15.8% in 1979, and bringing it down over the following three years cost a severe recession and a sharp rise in unemployment.

Building a Framework (1992 to 2003)

Almost everything about how British inflation is managed today dates from one week in September 1992. Sterling was forced out of the European Exchange Rate Mechanism on the sixteenth, the government having raised interest rates twice in a single day in an attempt to hold it there. With the exchange rate gone as an anchor, an explicit inflation target was announced three weeks later. In May 1997, days after taking office, the incoming government gave the Bank of England the power to set interest rates itself rather than on the Chancellor's instruction. The target has been 2% on the CPI measure since December 2003.

Post-Covid Inflation (2021 to 2023)

In the UK, prices rose fastest in October 2022, at 11.1%. The causes of the post-Covid inflation were global in nature, beginning with the lockdowns: factories and ports closed and the shipping between them fell out of sequence, so goods took longer to make and longer to arrive. Governments had spent heavily supporting household incomes through those closures, so when restrictions lifted there was money waiting to be spent and not enough on the shelves to spend it on. Then in February 2022 Russia invaded Ukraine, disrupting two of the world's largest suppliers of wheat, fertiliser, oil and gas at once, and the cost of everything grown, heated or transported rose with them.

Because the causes were shared, so was the timing: most countries peaked within a few months of one another in late 2022. The major inflation events covers this episode and the others in more detail.