Article last updated 30 September 2025.
Edward Smith, Head of Asset Allocation Research, Rathbones
Prices have gone up a lot over the years. Mr Darcy, in Jane Austen’s Pride and Prejudice, earned his status as one of the most famously flush men in English literature with an income of just £10,000 a year at the turn of the 19th century. Fast-forward a hundred years or so and Charles Foster Kane’s $60 million fortune in Citizen Kane established him at the top of the rich list. You would need a thousand times that today.
Pride and prejudice and inflation
One of the most complicated and fiercely debated of everyday life’s economic phenomena is why and how prices keep rising. The vast majority of us experience inflation and its consequences every day.
Everyone buys goods and services; most of us earn a wage or an income from their savings and investments; everyone ages; everyone lives in a globalised world, a world changing all the time with technology and innovation.
Yet understanding how all of these universalities interact and the effect that they have on the prices we pay every time we go to the till is not easy. Moreover, many of Rathbones' clients have inflation-adjusted return targets (in economics we call that a real return target). They want to generate a return over and above the rate at which consumer prices rise, preserving the purchasing power of their wealth and growing it or drawing an income from it.
Influenced by the past
Inflation in the UK has averaged 2.1% a year over the last 25 years, but during the 25 years before that it averaged 8.4%, breaching 25% in the 1970s. Now we are all particularly fallible to assuming that our past experiences are the rule rather than the exception, and older readers may be tempted to think the recent quiescence is unusual.
If that is you, you are in good company. A fascinating (if rather unnerving) paper by three economists at Berkeley has revealed how personal experiences of inflation have strongly influenced the voting tendencies of Federal Reserve policymakers over the last 60 years. In other words, rather than setting interest rates based solely on current economic fundamentals, those highly intelligent men and women tasked with steering the US economy have been swayed strongly by their past experiences of inflation.
Over the last 250 years, periods of low inflation are not unusual. In fact, the 1970s and 1980s were rather unique: outside of periods of war, inflation has rarely strayed too far away from low single digits. In the 19th century, it averaged 0%.
What drove prices higher in the 1970s and 1980s was a combination of the unfortunate and the ill-advised. The deregulation of mortgage lending and the mass adoption of credit cards fuelled an almighty consumer boom, while the government slashed taxes and made a dash for growth. Wages rose and rose, in no small part due to monopolistic labour unions that called strikes whenever pay caps were mooted, crippling productivity.
The 1973 oil crisis doubled the price of petrol. When it all came crashing down the situation was made far worse by appalling monetary policy decisions that left firms’ and households’ expectations of what prices would be next year — or the year after that — dangerously unanchored.
This perfect storm is unlikely to be repeated. Lessons have been learned a very hard way. Since these events inflation — and wage inflation — has been characterised by a slow-moving, stable trend.
It is often helpful to think of inflation in terms of the old adage, too much money chasing too few goods. But do not let the simplicity of that statement fool you: the influences on the flow of money and the amount of goods (and services) are legion.
Maybe history has taught some of us to be too wary of inflation, but it is clearly sensible to be cautious. A recent US project called the National Transfer Accounts has confirmed what a few economists have always suspected: that consumption does not always fall with age.
What people spend their money on does change with age — the very old spend very large sums on healthcare, either privately or via government programmes, which is closely linked to wage inflation. The young, by contrast, spend more on technology, which — in recent years at least — has largely gone down in price.
We all experience inflation — albeit at different rates. With longevity meaning much longer retirements for many of us our savings are having to stretch further.
It is a truth universally acknowledged that a single person in possession of savings usually wants to protect them from inflation. Fortunately, we have wealth managers to take that responsibility!
Visit our inflation calculator here.