The ongoing tensions caused by low interest rates and low inflation

Older readers will remember the days when prices seemed to heading ever upwards, and when pay rises were frequent to keep pace with the cost of living.

High inflation – for much of the 1970s it was over 20% – had some ruinous consequences, with regard to savings for example. Money kept in banks fell hopelessly behind inflation, and so its capital value was devalued year after year after year.

A flipside of that was that it was a good time to borrow: loans plummeted in real terms, as inflation quickly wiped out the value of the borrowed sum.

The people who did best out of the relentless rise in prices are those who borrowed heavily to buy homes in the 1960s, 70s and 80s. Inflation reduced the value of their mortgages in real terms and has left them with a valuable asset.

This was profoundly unfair on thrifty people. Those who saved and minimised their debts lost out badly in comparison to those who borrowed recklessly.

One of Margaret Thatcher’s prime economic goals in 1979 was to bring inflation under control. This was achieved within years and it has been mostly low ever since.

But this has created its own problems. Ultra low interest rates have accompanied the lower inflation and have led to a different sort of inflation: that of assets.

Houses, for example, are now vastly more expensive than they were decades ago, and the younger generation is finding it hard to buy without either parental help or without taking on huge debt of five times their income or more.

The recent rise in interest rates was modest but might help curb any future house price boom.

Inflation eased to 3% last month, which is low by historic standards. This means interest rates are less likely to rise and the economic tension caused by low inflation accompanied by low rates is set to continue for the foreseeable future.