Brainwashed into believing low inflation to be a 'good thing', David Smith begins to doubt the wisdom of achieving it by imposing high interest rates and ignoring the other factors which inflation reflects.
In a moment I'm going to say something very shocking. If you're not already seated, this might be a good time to sit down. For an economic commentator, this is the equivalent of the Bishop of Durham questioning the Virgin Birth, or Tony Blair asking himself whether he needed to get rid of that silly old Clause Four. Ready? Here goes.
Low inflation may not be very good for us. All that brainwashing about the need to break the vicious circle of rising prices and the debasement of the currency has meant that no one seriously questions whether zero inflation actually achieves anything - and certainly not people like me, exposed daily to a full dosage of Treasury and Bank of England orthodoxy.
At the outset I should say that the brainwashing has still been generally successful in my case. Having seen too many episodes which began with a little bit of inflation and ended up with a full-blown crisis, with the pound tumbling and interest rates soaring, I cannot yet bring myself to abandon the orthodoxy. Even so, one or two doubts have begun to creep in.
For one thing, it is plain that relative inflation is as important a bench-mark as absolute inflation. An inflation rate of 10% in Britain would not be a disaster if competitor countries were running similar rates. This was one reason I found it hard to get too excited about the strong rise in raw material prices recently seen. For companies, a 12% annual rise in input costs is uncomfortable. But such rises were a product of rising world commodity prices and thus experienced by everybody. And, in any case, raw material costs are, in aggregate, a small proportion of total costs.
Relative inflation is the key to competitiveness. Here again, however, the story is not as straightforward as it appears. If a Japanese hairdresser, or hotelier, tried to sell his wares at prevailing Tokyo prices in Britain, he would find few takers. This does not arise because, plainly, such services are not internationally traded. The requirement for competitiveness is that traded goods, and services, can compete in world markets, which is a different kettle of fish.
The low-inflation orthodoxy would dismiss this argument on the grounds that inflation in non-traded goods and services will still result in a loss of competitiveness, by raising the costs of the firms which do sell internationally, not least by boosting wage demands. It is an indirect route but let us allow it, for there is additional ammunition.
It is a tenet of the low-inflation orthodoxy that to give up on the fight for stable prices will mean, in the long-run, that growth suffers, either because of a loss of international competitiveness, or because economic decision-makers are diverted from the task of creating wealth into that of protecting themselves against inflation. Thus, resources are diverted into traditional hedges such as property, rather than investment in plant and equipment. In a time of inflation, there is insufficient reward for the kind of enterprise that improves the economy's productive potential.
All the above must be true, although there are offsetting disadvantages to a situation of absolute price stability. For one thing, it is harder to adjust relative prices in a way that provides the right incentive structure for growth sectors. It is also a question of degree.
Professor Robert Barro of Harvard University, currently a visiting fellow at the Bank of England, has tried to quantify the effects of higher inflation on economic growth. His broad conclusion is that there is a negative effect, but a very small one. In broad terms, it takes a very big rise in inflation - roughly 10 percentage points on the average annual inflation rate - to produce a small reduction in economic growth, of 0.2 to 0.3 percentage points a year.
It can be argued, as Barro does, that even a small effect such as this will be significant over time. As he says, over 30 years, the level of GDP would be between 4% and 7% lower than otherwise. But remember, this would only result from a very big rise in the annual inflation rate.
There are plenty of reasons why few would advocate allowing inflation to run at a rate of 10-15% a year rather than the Government's current 1-4% target. The most powerful of these is that once inflation gets beyond a certain point, it becomes virtually impossible to control, and can easily degenerate into hyper-inflation.
But just as allowing inflation to run out of control is obviously a bad policy and would hit economic growth, however modestly on the Barro research, there is also a risk at the other end of the spectrum. If policymakers try to confine an economy into the straitjacket of too low an inflation rate, the means of achieving this - by imposing higher interest rates whenever growth threatens to become too strong - also involves a sacrifice. Between the two points there is almost certainly an optimum combination of inflation and growth. But, as far as I know, there has never been an attempt to define it.
In Britain, this will come to a head over the next couple of years. The Government has set itself a very tight inflation target, achieving a rate in the lower half of its 1-4% target range (ie below 2.5%) by the time of the next general election. If that is only achievable by punitively high interest rates, I have little doubt that the target will be sacrificed. Indeed, we may already have had a foretaste of this with Kenneth Clarke's refusal to raise interest rates, against overwhelming expectations in the financial markets, in May.
Perhaps this is as it should be. Inflation reflects a whole series of factors, including worldwide commodity market movements and the position of the economy within the cycle. Imposing a straitjacket that takes little account of such factors will not only be uncomfortable, it may also be highly inappropriate.
David Smith is economics editor of the Sunday Times.