Inflation, again


In his City AM editorial today, Allister Heath notes that inflation does have some benefits (most obviously, it erodes the debt burden for government, companies and households). His conclusion, however, is a robust one:

On balance, however, using inflation to sort out one’s problems is a mistake. It is better to do it the hard way. You cannot fool everybody all of the time. People learn and start putting up prices and wages; this begins to fuel a self-fulfilling inflationary spiral. Soon, lenders begin to slap risk premia on the interest rates they demand – so not only do nominal rates go up, real ones also rise, choking off demand. We learnt in the 1970s that inflation doesn’t sustainably boost jobs and growth but merely leads to stagflation – why has everybody forgotten?

Answers on a postcard, please...