The inexorable upward march of prices is something that has come to be taken for granted; it is only the rate of inflation that changes, it seems, never the direction. But this has not always been the case. At the turn of this century the pound was worth about the same as it had been 200 years earlier. Since then inflation has eroded over 97% of its value and the pound is now worth less than a 40th of its 1900 value.
The graph above shows the changing level of UK consumer prices from 1661 to the present day, chronicling inflation's ascents and descents until 1942, after which it has only risen. Although there is no single set of statistics covering the whole period, there are various series which, when amalgamated, form a reasonable picture of prices over the past 330 years.
The further back in time the graph goes, however, the more it serves only as a rough guide. The range of goods covered by the index in the 17th century was fairly limited and confined itself mainly to foodstuffs and essentials; today's index is far more comprehensive and is updated yearly.
To see how the retail price index reflects actual cost to the consumer it is useful to look at a long-established branded product. Rowntree's KitKat was introduced in the 1930s when it retailed for 2d, or slightly less than one new penny. Over the years the KitKat's price has followed RPI fairly closely. From its 1935 base it was cheapest in 1941, when it was effectively 7% `underpriced', and most expensive in 1962, when it would have cost about 20% over the odds. At 24p, it is currently about 5% more expensive in real terms than it was when first sold.
This relative stability is in sharp contrast to other products, particularly those under continuous development - £1,000 will buy a far better computer today than a million would 20 years ago. Since it is necessary to revise the index's weighting regularly to take product improvement and changing patterns of consumer spending into account, it can only be an overall indicator of price levels and not a hard-and-fast rule.
One of the most striking features of the graph is the relative long-term price stability that existed until 1950. However, prices did fluctuate during this period, more than doubling in the early 19th century and again near the beginning of this century. Almost invariably these sharp upturns coincided with wars, and their attendant high levels of government borrowing.
The year-in year-out inflation of prices that started in the 1950s and has continued until the present day is a truly modern phenomenon. Prior to this, steep rises did occur from one year to the next - between 1799 and 1800 prices shot up by 32%, steeper than any yearly increase in the infamously inflationary 1970s - but rises were always followed by corresponding falls and prices rarely went up for more than a few years in a row.
Despite the Holy Grail-like status the current government has conferred on zero inflation, we should not regard the years up to the 1950s as a golden age. Conditions of economic uncertainty do not foster economic growth, and price swings, regardless of direction, are damaging. What of constantly falling prices? These can be equally bad - because interest rates cannot be negative, deflation can result in cripplingly high real interest rates - the strongest possible deterrent to businesses seeking to borrow in order to expand.
Perhaps then, a little inflation is a good thing - clearly nobody wants a return to the galloping inflation of the '70s, but a return to the days when hiding money under the mattress would bring a good rate of return could be even worse.
Source: International Historical Statistics.