Teresa Hunter: Britain opts for inflation to get rid of its debt

I SOMETIMES think how nice it would be if you could succumb to a touch of anorexia, like you catch a touch of flu. Severe enough to shed a couple of stone but not enough to make you sick.

Shameful, I know, because anorexia is a horrific illness, which should not be trivialised even in my daydreams. Once bewitched by the holy grail of thinness, victims lose all power to reverse their descent into hell.

So it is with the economy, which, if left to its own devices, would have starved to death had it not been for Mervyn King, Bank of England governor.

He opted for a remedy of force feeding with zero interest rates and funny money from the printing presses. But a diet of cream cakes and sticky toffee pudding can trigger other disorders equally difficult to treat. Ask any bulimic.

Right now, for the sake of warding off anorexia, we are ignoring the bulimia coming down the track. Perhaps it is the lesser of two evils? Can it be reasonable to ignore the odd bilious attack, if it prevents an even worse fate?

That's about as far as I can take this analogy, particularly as I know nothing about medical matters. What I'm getting at is our present course of inflation.

Prices are rising at 5.3 per cent or at 3.7 per cent, according to various indices, way beyond the 2 per cent target given to the Bank of England. King duly wrote a letter of apology to new Chancellor George Osborne in which he explained why inflation is nothing to worry about, with a logic so twisted it would terrify the most opportunistic grifter.

He says provided there are no further increases in VAT and petrol then inflation will fall back in about a year. But we all know that petrol (certainly) and VAT (probably) will rise. Some of the stores are already repricing their goods.

He says that spare capacity in the economy is keeping inflation in check. But he then goes on to say that when we finally spurt back into sharp recovery, the removal of this spare capacity will keep inflation in check. Doh!

The new chancellor is also talking about reintroducing an element of housing costs into the inflation equation, which must surely push the indices up again.

The only rational conclusion must be that the authorities, like many other governments, while decrying inflation are quietly but actively pursuing inflationary strategies as a means of solving our financial problems. Unable to repay our debts, we will inflate some of them away.

You only have to look at the numbers. Friday's figures from the Office for National Statistics put UK borrowing at 893.4 billion.

The new government has said it plans to end the secrecy surrounding public sector pensions and bring these plus the cost of the Private Finance Initiative onto the national balance sheet. Pensions would add about a further 1 trillion and PFI a few hundred billion.

To fund this lot, we will have to find in excess of 2 trillion before we can get our finances anything like straight. Such sums are impossible to imagine, so let me help you. A trillion is a thousand billion. Two trillion pounds is two thousand billion pounds.

A 1p increase in income tax raises a minute 3.5bn. A 10p increase 35bn. If the government took every penny we earn, and increased the basic rate of tax by 80p, that would still only raise an extra couple of hundred billion.

In other words, we'll never do it. It can't be done. Judging by King's letter, he has already accepted this and judges a touch of inflation a lesser evil.

The rest of us need to plan accordingly. Inflation is tax by another name, and we always fight taxes. Furthermore, like anorexia, there is no such thing as a light dose. Once the genie is out of the bottle there is no stopping it.

Cash is the biggest victim, as the buying power of your nest egg erodes.

Property is a good hedge against soaring prices, as are National Savings index-linked investments and government gilts. Shares too can offer value via a rising dividend stream. Anyone with an index-linked pension is laughing.

You don't believe me? Think of the long-held treasured principles King has abandoned.

He's shored up failed institutions, printed money, slashed interest rates, all once anathema. To allow inflation a little airing would be the least of his betrayals.