Background and inspiration
During the 1960s Penny Lane was a significant bus terminus for several routes, and buses with "Penny Lane" displayed were common throughout Liverpool. The name Penny Lane is also used for the area that surrounds its junction with Smithdown Road, Smithdown Place (where the terminus was located) and Allerton Road, including a busy shopping area. In 2009, McCartney reflected:
"Penny Lane" was kind of nostalgic, but it was really a place that John and I knew; it was actually a bus terminus. I’d get a bus to his house and I'd have to change at Penny Lane, or the same with him to me, so we often hung out at that terminus, like a roundabout. It was a place that we both knew, and so we both knew the things that turned up in the story.
Lennon's original lyrics for "In My Life" included a reference to Penny Lane. After recording for "In My Life" began, McCartney mentioned to an interviewer that he wanted to someday write a song about Penny Lane. McCartney was later spurred to write the song once presented with Lennon's "Strawberry Fields Forever". Lennon co-wrote the lyrics to "Penny Lane" with McCartney. He recalled in a 1970 interview: "The bank was there, and that was where the trams sheds were and people waiting and the inspector stood there, the fire engines were down there. It was reliving childhood."
Beatles biographer Ian MacDonald suggested an LSD influence, and that the lyrical imagery points to McCartney first taking LSD in late 1966. MacDonald concluded that the lyric "she feels as if she's in a play / she is anyway" was one of the more "LSD-redolent phrases" in the Beatles' catalogue. Music critics Roy Carr and Tony Tyler similarly described the subject matter as "essentially 'Liverpool-on-a-sunny-hallucinogenic-afternoon'".