Chris Ison
"Inflation destroys nations and societies as surely as invading armies do," opined Margaret Thatcher, almost exactly 29 years ago.
"Inflation is the parent of unemployment. It is the unseen robber of those who have saved."
When the Conservative prime minister addressed the conference party faithful on 10 October 1980, inflation stood at 15.4% - enough to halve the spending power of a wage in four years. By the end of that year it was 18%.
Fast forward almost three decades and the beast that ensnared governments of every stripe, from Wilson and Callaghan to Thatcher and Major, is dead or very nearly so.
The Retail Prices Index, the traditional measure of inflation that includes mortgage payments, is currently running at -1.5%, while the government-favoured Consumer Prices Index was running at an annual rate of 1% in September.
Should we now try and revive inflation?
Not all bad in inflationary days
There were certainly up sides to it: we used to get big pay rises, for starters, which enabled us to shrug off our mortgage debts more quickly as our ability to pay outgrew the debt despite the high interest rates.
Many who are labouring under giant debts today might enjoy that.
And we certainly don't want to enter the world of deflation where prices fall, no-one wants to spend and debts become crushingly large, as happened in Japan in the 1990s. So perhaps inflation isn't all bad.
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Benefit of low inflation isn't simply low prices
Besides, it isn't immediately obvious how it was that inflation destroyed nations. If prices double, wages double, interest rates double and everything doubles aren't we just as well off as before?
That would be true if inflation squeezed equally everywhere by a known and pre-determined amount, but it never did.
Persistent high inflation destroys economies by eroding certainties and re-jigging the Rubik's cube of economic and pricing relationships between sectors of the economy.
Inflation destroyed certainty and undermined investment. If you want to start a business, and your business plan is based on particular raw material, rent and wage costs, it is much more difficult to go ahead when you don't know what they will be in a year or two's time.
Confidence in prices is one of the most vital parts of business confidence. Without it, few are willing to put up capital.
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Inflation sets worker against worker
It was unfair too. Some businesses could pass on higher costs, others could not.
Some employees in highly-unionised areas were able to enforce inflation-busting pay rises, but most lacked the muscle to do so.
Those on fixed incomes, those who lived on savings and occupational pensioners without full inflation uprating all lost out.
Inflation satisfies irreconcilable demands
One way of thinking of it was that capital and labour, the two main forces of production, each demanded more of the national income cake.
The only way to satisfy those irreconcilable demands was to mix more inflationary air into the cake mixture.
The cake rose, as the pounds and pence value of output increased, but like the cake's ingredients, the actual volume of goods produced was unchanged. They just cost more.
It is no accident that economies where there was social strife, like Latin America in the 1960-80s or Britain in the 1970s and 1980s, found it harder to control inflation than, say, harmonious Scandinavian nations, even when the initial inflationary impetus came from an external shock like rising oil prices.
As the Nobel prize-winning economist Milton Friedman said: "Inflation is the one form of taxation that can be imposed without legislation." That tax is paid most heftily by those with the least market power.
Cure as bad as the disease
If inflation was a result of too much money chasing too few goods, then the cure was often as bad as the disease.
Clamping down on the amount of money, principally by sharply increasing interest rates, can throw a spanner in the economy by slowing the flow of credit.
Though this current recession wasn't caused by higher interest rates, credit was still slowed (in fact it was almost totally glued up) by the near collapse of the banking system.
Add to that a wave of destocking by companies around the world, and jobs were bound to be lost on a grand scale.
Though it was accidental this time, it hasn't always been so.
"Rising unemployment and the recession have been the price we've had to pay to get inflation down. That is a price well worth paying," then-chancellor Norman Lamont said in the House of Commons in May 1991, a remark that caused uproar.
No-one really wants recession and no-one really wants roaring inflation, either. It's hard to guide an economy between the two.
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Inflation getting the kiss of life
However, if you think inflation is dead, it is worth looking at the Bank of England's £175 billion quantitative easing (QE) programme to see how the beast is being given the kiss of life, with official backing.
QE turns banks holdings of government and corporate bonds into cash, which can be spent by the banks or loaned. We're not yet seeing any inflationary effect because there is slack in the economy.
However, when you pump fresh cash into the economy it can emerge in all sorts of areas, including investment assets like shares or property. We're certainly seeing recovery there.
Add in the fact that the government is spending an additional £175 billion this year on state services than it is taking in from taxation and it is clear that the economy is undergoing the most extraordinary surge of money.
If that doesn't eventually emerge in inflation, I'll eat my hat. So don't feel sorry for the inflationary beast. You'll see him again soon enough.
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