A Dose of Inflation Could Start to Look Like a Cure for Our Current Ills

In the UK, a serious policy of trying to reduce the debt burden through inflation lies as an option in the future. Interestingly, a list of the economists who have supported it reads like a roll call of the top names in global macroeconomics.

What the protagonists have in mind is that the government would raise its inflation target, say to 4% to 5%, and the Bank would then be obliged to launch a massive program of QE to increase inflation. It would probably be helped by a sharp fall of the pound. But, just as in the past it has proved difficult to contain inflation, so in today’s climate it would be difficult to raise it—as the Japanese have discovered. Nevertheless, given sufficient determination it could be done. So why not do it?

Quite apart from the injustice that it inflicts, inflation is damaging to real economic efficiency. And once in the system, it is difficult to get rid of. In the early 1980s, both in the UK and in the US, it took a major recession to achieve this.

But higher inflation is necessarily always wrong. It depends upon what the alternatives are. At the moment, there is still some hope that a combination of government austerity and economic growth could rescue the UK.

But suppose that austerity is endured for several more years and still there is no sign of economic growth. Suppose, still more depressingly, that despite all this effort, the ratio of public debt is still rising relentlessly.

At that stage the inflation option might seem attractive, not only to analysts and professors, but also to the voters—and hence to the politicians.

It would be better, surely, to prevent us from reaching that stage by enacting radical measures to boost growth. Which brings me back full circle to the plight of the euro – and to our own Plan A. Where is the truly radical action from governments, both here and on the continent? Do they really understand the price of failure?

To read Roger Bottle article: A Dose of Inflation Could Start to Look Like a Cure for Our Current Ills

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Tagged as: Bank, Economic, Economic growth, Government, Inflation, Quantitative easing, Reserve Bank of India, Run batted in