Gareth Howlett: Politics and economics both play a part in the slow inflation dance

IN JANUARY 1972 I had my first paid job: a paper round, which meant I had to cycle through dark streets before breakfast. The streets were dark not just because it was midwinter in Yorkshire, but because the first national miners' strike since 1926 had cut off the supply of coal to power stations.

The National Union of Mineworkers, under Joe Gormley, eventually won a significant pay rise from the National Coal Board. When other groups of workers leapfrogged them they came back for more in 1974, winning a second and even more generous increase while destroying Ted Heath's Conservative government into the bargain.

The politics of that era seems a world away now - but there is one spectre from the 1970s which is haunting a number of commentators: inflation.

In 1972, inflation was 7 per cent. It peaked in 1975 at 25 per cent and remained high until the cold shower of Thatcherism slashed it from 17 per cent to 5 per cent in three years. Apart from a brief spike during the late 1980s, it has stayed at or below that level ever since.

And the defeat of inflation was a global phenomenon which contributed powerfully to the massive bull market in financial assets - both equities and bonds - during the 1980s and 1990s.

After the banking crisis and ensuing recession of 2008, the Bank of England (along with most other central banks) cut interest rates to virtually nothing and turned on the money supply taps.

Since then, inflation has been consistently above expectations, which has lead to splits in the Bank's Monetary Policy Committee and accusations that the Bank's official inflation target - an upper limit of 2 per cent - has been unofficially abandoned.

The Bank's stated view is that inflation is set to fall sharply over the next year, while sceptics fear it could stay around the current level or even go higher.

Let us examine the politics of inflation. As politicians from Cicero to Lenin have reminded us, if you want to understand what is going on, just ask who wins and who loses.

The coalition government came to power with a mandate to reduce the deficit, but with a number of commitments to protect favoured areas and groups. Older people are among the major winners from these commitments. They are the heaviest users of the NHS, the one major spending department to be spared top line cuts; and their various accumulated entitlements - free bus travel, winter fuel payments and so on - have been largely spared. Meanwhile, employees and students are facing higher taxes and higher fees.

What has this got to do with inflation? The big winners from inflation are those who owe money, since the real cost of their repayments falls steadily, while the big losers are the people who have lent the money.

It is young people who have debts and old people who have savings and investments.In this respect, inflation can be seen as a transfer of wealth from old to young, balancing the arrangements for raising and spending money which represent a transfer from young to old.

The difference is that inflation reallocates wealth in a much sneakier way: it is like having your pocket picked, rather than being mugged. Since older people are more active voters, this is politically useful.

Although there is a lot of grumbling, savers and investors are unlikely to riot in search of higher interest rates. And the comparison with the 1970s only starts to work when workers are able to push for above-inflation wage settlements. The fact that this has not happened so far is the strongest evidence the Bank of England can point to in defence of its policy. But if Bob Crow and the RMT transport union can do to David Cameron what Joe Gormley did to Ted Heath, all bets are off.

• Gareth Howlett is fund manager director at Brooks Macdonald Asset Management