Economists don't all adhere to the same definition of inflation. For Keynesians and monetarists, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. For the Austrian school, inflation is an increase in the quantity of money, and the increase in prices is a consequence of inflation, rather than being inflation itself. There are even more divergent opinions about its causes.
Whatever the different opinions among economists, for the average consumer, increases in prices are a bad thing - especially at a time like this when incomes are being squeezed. It's always depressing to drive past the petrol station and notice that the prices have gone up yet again, or to go into a supermarket and to see that fruit and veg has become yet more expensive. When, oh when, can we get inflation under control?
It has to be admitted that things are better than they were in the 1970s, when UK inflation was running at 20%, while no one would want the other extreme - the deflation which has gripped Japan for some 20 years. If people expect prices to keep going down, they hold back from purchasing goods, so the economy shrinks and people lose their jobs. The Austrian economist Freidrich von Hayek said, "I am not only against inflation, but I am also against deflation." This is a very sensible statement, and one that would be endorsed by every hard-pressed housewife. Unfortunately, it isn't endorsed by those responsible for economic policy in most advanced nations. The Bank of England and the European Central Bank both have an annual inflaton target of 2%. In the UK, if the annualised rate of inflation rises above 3% in a given month, the Governor of the Bank of England has to write an apologetic letter to the Chancellor of the Exchequer. Sir Mervyn King has had to write a good few of these in recent years. However, if the inflation rate fell below 1%, he would also have to write a letter of apology. Why on earth should an achievement which would be be a cause for rejoicing among most UK consumers require such action?
The answer is that 0-1% inflation wouldn't help the government. Governments borrow far more than the private sector, and government borrowing actually benefits from inflation. If you borrow, say £10 billion, say, for a 10-year term, the more a currency has inflated, the less that £10 billion is actually worth in 10 years' time, so the less in real terms (ignoring interest repayments) you have to pay. The government has a vested interest, therefore, in ensuring that inflation remains in positive territory.
Sometimes this happens without the government actually doing anything. Last year's poor weather has pushed up the price of food, for example, and this cannot be blamed on the government. It is likely that even if we get some better weather this year that falling food prices later this year will be offest by higher gas prices, so a "below inflation target letter" looks unlikely this year. However, for a government to engineer the economy deliberately to boost inflation is simply immoral. Reducing the value of money is basically a form of theft. Few economists want to ask moral questions, but the Bible makes it clear - Thou shalt not steal. (Exodus 20:15) A government that has to reply on theft (i.e., inflation) to make ends meet is a government guilty of breaking God's law.
Conventional economic wisdom regards low (as opposed to zero) inflation as essetial for growth. However, when it comes to a choice between God's word and conventional economic wisdom, the Bible must win every time for a Christian. Deuteronomy 28 makes it clear that a nation which obeys God's laws - and this includes Exodus 20:15 - will prosper. Furthermore in any debate over the Bible's teaching on deliberately engineered inflation, I'm pretty sure I know whose side the hard-pressed housewife would take. Are there any female MPs who have known the pressures of a tight family budget? We could do with such a person as Chancellor of the Exchequer when the post becomes vacant - and in view of Geroge Osborne's inability to rein in public spending and bring our debts down, the sooner this vacancy arises the better.
Whatever the different opinions among economists, for the average consumer, increases in prices are a bad thing - especially at a time like this when incomes are being squeezed. It's always depressing to drive past the petrol station and notice that the prices have gone up yet again, or to go into a supermarket and to see that fruit and veg has become yet more expensive. When, oh when, can we get inflation under control?
It has to be admitted that things are better than they were in the 1970s, when UK inflation was running at 20%, while no one would want the other extreme - the deflation which has gripped Japan for some 20 years. If people expect prices to keep going down, they hold back from purchasing goods, so the economy shrinks and people lose their jobs. The Austrian economist Freidrich von Hayek said, "I am not only against inflation, but I am also against deflation." This is a very sensible statement, and one that would be endorsed by every hard-pressed housewife. Unfortunately, it isn't endorsed by those responsible for economic policy in most advanced nations. The Bank of England and the European Central Bank both have an annual inflaton target of 2%. In the UK, if the annualised rate of inflation rises above 3% in a given month, the Governor of the Bank of England has to write an apologetic letter to the Chancellor of the Exchequer. Sir Mervyn King has had to write a good few of these in recent years. However, if the inflation rate fell below 1%, he would also have to write a letter of apology. Why on earth should an achievement which would be be a cause for rejoicing among most UK consumers require such action?
The answer is that 0-1% inflation wouldn't help the government. Governments borrow far more than the private sector, and government borrowing actually benefits from inflation. If you borrow, say £10 billion, say, for a 10-year term, the more a currency has inflated, the less that £10 billion is actually worth in 10 years' time, so the less in real terms (ignoring interest repayments) you have to pay. The government has a vested interest, therefore, in ensuring that inflation remains in positive territory.
Sometimes this happens without the government actually doing anything. Last year's poor weather has pushed up the price of food, for example, and this cannot be blamed on the government. It is likely that even if we get some better weather this year that falling food prices later this year will be offest by higher gas prices, so a "below inflation target letter" looks unlikely this year. However, for a government to engineer the economy deliberately to boost inflation is simply immoral. Reducing the value of money is basically a form of theft. Few economists want to ask moral questions, but the Bible makes it clear - Thou shalt not steal. (Exodus 20:15) A government that has to reply on theft (i.e., inflation) to make ends meet is a government guilty of breaking God's law.
Conventional economic wisdom regards low (as opposed to zero) inflation as essetial for growth. However, when it comes to a choice between God's word and conventional economic wisdom, the Bible must win every time for a Christian. Deuteronomy 28 makes it clear that a nation which obeys God's laws - and this includes Exodus 20:15 - will prosper. Furthermore in any debate over the Bible's teaching on deliberately engineered inflation, I'm pretty sure I know whose side the hard-pressed housewife would take. Are there any female MPs who have known the pressures of a tight family budget? We could do with such a person as Chancellor of the Exchequer when the post becomes vacant - and in view of Geroge Osborne's inability to rein in public spending and bring our debts down, the sooner this vacancy arises the better.