How does the political economyof inflation impact on different social and economic groups? IntroductionIt is precisely because inflation is a highly controversial notion from an economic perspective that political economists have developed a particular interest for its political implications. The vast majority of the literature regarding the political economy of inflation seeks to demonstrate that macroeconomic indicators are inherently political. In other words, they are tools used by policy-makers to depict an economic reality in various ways. ‘Macroeconomic indicators are political both in their origins – the choices or against particular formula to calculate them – and in their consequences – their use in public policy and the debate surrounding it’(Mügge, 2016).The main idea behind this argument is that policy-makers make an interest-based use of macroeconomic indicators. In the case of inflation which, policy-makers use inflation indexes to attenuate or exaggerate certain macroeconomic dynamics. If this view has tended to be accurate over the vast majority of the 20th Century, it seems to lose in accuracy in periods of ‘very high inflation’. What do we consider as ‘very high inflation’? To the extent inflation is a controversial and complex notion, it is rarely at the epicenter of the political discourse. Thus, candidates and government officials do not have a particular interest to put an extremely complex macroeconomic issue such as inflation as a top priority of their political agenda. This objective reality changes in a very radical way, when inflation reaches levels sufficient to impact wages, pensions or mortgage interest rates. In these particular circumstances, when inflation becomes a key priority for policy-makers desirous to answer voters’ primary concerns, we can talk about a period ‘very high inflation’.Thus, thispaper’s main objective is to demonstrate that policy maker’s advantageous useof inflation indicators lessens in periods of ‘very high inflation’. In thesespecific periods, inflation reaches levels that makes it a ‘consensual notion’.As inflation directly affects social and economic groups, they are likely topunish incumbent governments. To this extent, the power shifts from theclosed-doors of the Government’s buildings to the ballot box. The UnitedKingdom from 1974 to 1979 offers a powerful illustration in support of thisargument. During this period, Great Britain experienced an exceptional highrate of inflation which affected many socioeconomic groups. Wilson’s governmentinability to reduce inflation broke the ‘Social Contract’ between the Labourand the working class, ultimately leading to the party’s defeat in the 1979General Election. During these five years, the political economy of inflationshifted from the closed-doors of Whitehall to Main Street.The Current Political Economy of Inflation: when policy-makers take advantage of inflation indicators A vastliterature (Fioramonti, Mügge) describes the evolution of the economy as being anincreasingly quantitative subject. This literature argues that more than everwe live, especially in the economic field, in a world of numbers. Such movementgoes in pair with the rising importance of macroeconomic indicators in both thedomestic and the global macroeconomic policy-making.In this worldof numbers and indicators, politicians make an extensive use of indicators todesign polices while the electorate assesses the government’s performance inregard of these indicators. As for the GDP, inflation measurement has changedover time firing critics over the quality of data used (Fioramonti, 2014) or overthe manner these indicators were built. Again, as inflation is a controversialnotion, its measurement has never been an easy-going a process. As a result,indicators used have changed over time and this, even in countries whichpossess well-recognized national statistics institutions. First, ifinflation is higher than wages growth, people are naturally worse-off. Thispoint is capital because as we will see later it is certainly the most painfulconsequence of inflation but also the principal reason why voters might punishincumbent governments in periods of ‘very high inflation’. Secondly, in manycountries, pensions, benefits or public-sector wages are linked to inflationindicator. In countries with large welfare states, a little change in inflationcan have significant impact. In France, for instance public expenditure represented57% of the GDP in 2015 according to the annual report on public spendingpublished every year by the OECD. Finally, ifthe prices of certain goods in the economy are growing faster than the interestrates required to acquire these goods, it can fuel a bubble which willpotentially burst and ultimately lead to an economic crisis (Hay, 2009) involvingheavy consequences for many socioeconomic groups. Now we haveoutlined the potential impacts of inflation on various economic actors, we mustexplore the key issue of the political economy of inflation: the fact that theconstruction of inflation indexes is intresically political. In Great Britain,the inflation indicator is the CPI (Consumer Price Index) examines the weightedaverage of prices of a basket of goods and services. It appears clear that theinclusion of the exclusion of certain goods or services might have asignificant impact on the ‘official’ inflation rate in a given country. Mügge remindsus the impact of inflation indicators limits in the United State. According toa 1995 report of the US Senate Advisory Committee, the US CPI overestimatedinflation by 1%, meaning that inflation-indexed transfers rose by 1% overdecades. If a given indicator carries in itself political choices it is evenmore the case when a country decides to change its inflation indexes. Theexample of Great Britain is striking. Over the course of the 20 Century, HerMajesty’s Government changed its main inflation indicators no less than threetimes. It first started with the RPI (Retail Price Index) which was replaced in1947 by the CPI (Customer Price Index) in order to better compensate workersafter huge sacrifices they made during the Second World War. In 2013, the CPIHemerged in place of the CPI. Four years after the crisis, the CPIH includedmortgage payments. All thepoints developed above aimed to describe the current political economy ofinflation: in period of low inflation, policy-makers enjoy the power to use attheir advantage indicators to ‘manipulate’ the electorate or socioeconomicgroups. What happened in period of ‘very high inflation?When Main Street Redefines the Political Economy of Inflation: The Case of the United Kingdom from 1974 to 1979This secondpart will explore to what extent during the 1970’s in the United Kingdom, the‘very high inflation’ broke the ‘Social Contract’ between the working-class andthe Labour party ultimately leading to the arrival of the New Right inWhitehall.The UnitedKingdom from 1974 to 1979 offers a prime example of the circumstances in whichsocioeconomic groups take back the power from governments by not acceptinganymore the ‘politicisation of inflation’ (Mügge, 2016). Indeed, during thisperiod inflation became one of most the important issue for both parties as ithit harshly many socioeconomic groups. Table 1 helps us to better understandwhy inflation constituted a burning issue during this period.Table 1The 1973oil crisis marked the end of the ‘golden age’ of full employment, sustainedeconomic growth and relatively stable prices (Peden, 1985). The conjunction ofincreasing oil prices, the Nixon shocks, flows of dollars coming from the UnitedStates aiming to help Europe rebuild its economy, provided a propitious globalmacroeconomic context for the emergence of inflation in the United Kingdom. Bythe end of 1974, the rate of inflation was 23% and between 1974 and 1975 itrose over 26% (Table 2). Domestically, the Conservative government formed afterthe 1970 General Election took several measures to fight inflation includinglimiting wages. Despite several successes on the short term, inflation remainedat historic high levels. This fueled a growing dissatisfaction amongst largeparts of the electorate including workers.Table 2Thisgrowing dissatisfaction partly explained the return in power of a Labourgovernment led by Harold Wilson. As stated by Leys, ‘Wilson made Labour’sability to repair the government’s relationship with the unions the cornerstoneof his policy’ (Leys, 1989) what has been later called the ‘Social Contract’.Trade Unions expected from the government to stop limiting wages. However,limiting inflation rested on the ability to limit the growth of wages (Leys,1989). As a result, the government attempted to increase public spending inorder to attenuate the effect of inflationary policies.As the 1979General Election approached, inflation remained at the top of the politicalagenda. 3 May 1979,the Conservatives led by Margaret Thatcher take 44% of the vote with a majorityof 21. What led to the election of the most liberal government since the firsthalf of the 20th Century? First ofall, each party’s ability to fix inflation was seen by voters as one of themost important issue of the election. In both manifestos inflation wasmentioned as being a key priority. As we said above, campaigning on a complexmacroeconomic indicator such as inflation has never been a winning recipe forpolitical parties. However, during the 1970’s in the United Kingdom as inflationwas a primary source of concern for many socioeconomic groups this general ruledid not verify. Table 3 outlines Labour party’s declining credibility overinflation. Table 3Butlerestimates that Labour’s relationship to the working-class base is one of themain explanation of the outcome. Surveys conducted between 1978 and 1979 allplace inflation as one of the three most important issues for trade unionsmembers (Butler, 1980). Trade-unions excerced a strong influence on theworking-class at a time when political identification was still very strong achanging attitude of trade-unions had serious electoral consequences for Labour.The breakingof the ‘Social Contract’ was emphasized by James Callaghan at the Labour Conferencein October 1979 when he spoke of his shock at a poll report during the campaignthat the Conservative party was seen as having more concern for ordinary peoplethan the Labour party (Butler, 1980).Table4 shows that about 8% of trade-unions members (versus 1974) swing to theConservatives.Table 4All thesefigures illustrate the fact that trade-unions and more broadly theworking-class dissatisfaction to the Labour party greatly explain the GeneralElection outcome (Butler 1980). Having been one of the socioeconomic group thatwere most hardly hit by inflation, the working-class broke the ‘Social Contract’and punished Mr Callaghan’s party (Peden, 1991). Conclusion This paperattempted to offer an alternative political economy view of inflation: wheninflation highly impacts socioeconomic groups the ‘politicisation’ of inflationcomes to an end.If it istrue that most of the time, policy-makers enjoy the power to make anadvantageous use of inflation indicators to serve their own interests, thiswidely acknowledged argument includes limitations in certain exceptionalcircumstances.We recognizethat our argument could attract critics from the proponents of the traditionalpolitical economy of inflation such as Mügge or Fioramonti to the extent itrelies on the subjective notion of ‘very high inflation’. In our view, we cantalk about ‘very high inflation’ when inflation constitutes a key priority forthe majority of political parties. Why would political parties constitute areliable indicator of socioeconomic groups’ primary concerns? Considering thatpolicy-makers are self-interested, we think they perfectly know that it is intheir best interest to resolve voters’ concerns. As a result, they offer anauthentic mirror of society. Some would object that political parties are notanymore representative of society’s diversity. Today, they are probably true inas we are living in era characterized by persistent declining turnout and partyidentification. However, it was not the case during the 1970’s in the United Kingdomand in many other developed countries. Mügge wouldcertainly say that selecting the United Kingdom as an example of our argumentinvolves a major bias to the extent its electoral system favours voters’punishment of incumbent governments. Indeed, it is easier for voters to assigna blame in a single-party system in which political party cohesion is significantthan in a coalition-system where parties’ responsability is shared.In brief,we must acknowledge that the political economy of inflation has been and willcontinue to be a highly debatable issue. 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Paris France. https://data.oecd.org/gga/general-government-spending.htmPeden, George, (1991) ‘TheChallenge of Inflation, 1973-83’, in Philip Allan Publishers Ltd, Politics in Britain: from Labourism toThatcherism,pp.196-13.Get Help With Your EssayIf you need assistance with writing your essay, our professional essay writing service is here to help!Find out more