So what is so bad about inflation?
Governments always fight the last economic battle that they lost. So today the sole target the Bank of England is told to hit is to control inflation lest we have a re-run of the 1970s or 1980s when prices rose by well over 20 per cent annually.
Before that the government lodestar was one of the monetary growth measures such as M4, and prior to that it was the balance of payments and the value of the pound that dictated policy to avoid a repeat the 1960s-style runs on the pound.
But having given the Bank just one target it has failed. It is allowed to let GDP growth, unemployment, sterling and all other measures run riot so long as inflation is under control - yet it is above the target and rising. Now we risk imposing pain on the populace to get it back on course.
But should we worry? If we learned anything from the hyper-inflation of the ’70s and ’80s it should be that we can take it. Rather than being so scared of it that it dominates today’s economic policy we should accept that inflation was high but Britain survived.
The downsides of rising prices are frequently set out but there are upsides too.
It is easy to cut real wages when inflation is high, for instance. The below-inflation pay deals being accepted by workers now are a pay cut and a reduction in living standards - just the cure required for the problem - but one unlikely to happen when inflation is, say, just 2 per cent.
Indeed, in a world where many prices are on an upward-only price ratchet (rents as well as wages, for example), high inflation allows the readjustments to the economy whereby some items can move ahead rapidly while others stay static. (Think of an office where two workers are on the same pay when there should be a differential. Ideally one’s pay would be cut and the other’s raised, but that is impossible: however inflation allows a token rise for one and a significant pay increase for the other to produce the correct balance.)
And inflation will help solve the problem of overpriced assets. House prices never fell in the ’70s or ’80s slumps, but by remaining flat when inflation was over 20 per cent they effectively fell in real terms. High inflation now will restore the balance between incomes and property prices much quicker and without the need for large price falls.
Perhaps when inflation busts the targets maybe it is time to change the targets rather than the policy. By keeping interest rates high to try to hold down inflation we are in danger of producing a recession that is far more painful that prices rises - and which turns inflation into stagflation.
