1959: Here We Go Again

Inflation had become an important political issue in 1957, but it seemed to have been overcome after the deflationary measures of September that year. Retail price inflation was down to 1.9% in the year to December 1958 and prices fell in the year to June 1959 (Figure A5). Nevertheless, inflation remained a threat. Opinions differed as to what caused it and what policies should be applied to it.1 The cost-push theory asserted that much of the impetus came from costs — mainly, in the circumstances of the mid- to late 1950s, wage costs. Increases in wages in one industry led to emulation in other industries and thus price increases, which in turn set off pressure for further wage increases. On this theory, the solution was for the government to intervene in the wage-setting process through incomes policies of some kind. The cost-push theory could even, in particular circumstances, be used to justify a policy of expanding demand in order to reduce inflation: ‘it is even arguable that raising aggregate demand and production when aggregate demand is running below the supply potential of the economy would, by lowering real costs, have a damping effect on the inflation proceeding’.2 The demand-pull theory, by contrast, asserted that inflation was entirely the result of excess demand and that lower aggregate demand and higher unemployment were unavoidable if inflation were to be overcome.3