We need to cut inflation down to size

Yesterday's inflation figures showed that the Consumer Price Index (CPI) measure of inflation in October dropped slightly to 5%, from 5.2% last month. CPI is the government's preferred measure, which does not take housing costs, such as mortgage repayments, into account. But those of us who still have mortgages to pay off might prefer to look at the more traditional Retail Price Index (RPI), which is even higher at 5.4%, down from 5.6%.

The Bank of England reckons that inflation is largely an effect of the falling pound, which makes imports more expensive, particularly the things it is hard to do without, such as fuel and food, which are largely imported. It is not helped by rising commodity prices as Asian countries bounce back from the slowdown and start building things again. They figure these pressure will ease, and when the VAT rise drops out of the calculations after it has been in place a year, the indexes will fall again, they say.

Well, they would say that, wouldn't they? It rather diverts attention from the £75bn of new money which the Bank 'printed' (in the form of Quantitative Easing) before expanding the programme to £200bn later that year and increasing it again recently to £275bn. And as we know, thanks to Milton Friedman, inflation is always and everywhere a monetary phenomenon. When you print too much money, it loses its worth.

So is that what is going on here? It's hard to say. The other folk who create money are the banks. Indeed, they can create it at the stroke of a pen, just by giving loans to their customers. The trouble for lots of their customers is that the banks have been more reluctant to do that recently, having had their fingers burnt by the crisis of 2007/8. So the Bank of England figures it is just replacing the money that the banks are no longer creating.

Maybe. For quite a long time through the noughties, the Bank had a target of 2% inflation which it failed to meet, month after month. And that was despite the fact that a strong pound and cheap imports from the likes of China meant that, if anything, prices should have been falling. The Bank stoked up a boom, and it was the inevitable bust of that boom that led to our present problems.

Yes, we need an big enough quantity of money around the place that banks and businesses have enough to lubricate the wheels of commerce. But you don't want to take risks with inflation. it is corrosive. When all prices are rising, it becomes harder to distinguish the 'signal' of real price rises and falls from the 'noise' of prices rising everywhere. How many people really know whether their house has gained or lost value, when the cost of living is rising so fast? How many entrepreneurs, for that matter, know if their investments are really paying off, after inflation is taken into account? They don't – and that is why inflation causes people to put their time, effort and money into the wrong things. That's a luxury we really can't afford in these times. We need to get inflation down. And fast.