We started writing our briefing on Inflation last July, as oil was hitting $140 a barrel and household living costs for poor pensioners rising at almost double figures. The MPC was engaged  in a fierce battle between those like Tim Besley - who worried about the costs of bringing it down if it was allowed to rise further - and David Blanchflower-  who had been alarmed about a possible recession for more than a year (Willem Buiter accuses Blanchflower of being lucky, not wise).

Then it all kicked off, with far worse consequences for economic growth than some expected. By the time we were published, editorials were fretting about deflation instead.  But did this mean our stand on the Bank's independence was out of date? We said no.  There are two good reasons.  First, as we have seen, deflation and the accompanying ad hoc procedures for dealing with it, needs for its defeat a credible central bank. Secondly, after a period in which the whole world of finance has been accused of ignoring giant problems brewing under its nose, it would be foolish to dismiss what might be the reality of 2011: giant fiscal deficits, considerable QE out of the pipeline and into the real economy, a stuttering recovery which the politicians will be terrified of strangling . . . the political pressures in favour of inflation will be vast.  And serious structural problems with the world's supply of food and fuel have not gone away.  As the FT writes today,"some view inflation as a clever way to eliminate the overhang of private- and public-sector debt. But it would also make another severe recession inevitable, this time to eliminate resurgent inflationary expectations. It would be crazy to add such inflationary insult to the deflationary injury."

In America the debate is still raging: Mankiw links to a debate between Krugman and Meltzer on this one.  Meltzer doubts that the Fed will have the political courage to take the tough steps in the future.   Krugman is more narrowly focussed on the recent state of the economy and the paradox of thrift. I am closer to Meltzer on this one: deflation seems unlikely with all the QE and fiscal deficit spending.  Maybe, like Tony Jackson, I see things too much through the eyes of an investor, with inflation a virtually unlimitless threat.  I would like the suggestion of Tim Leunig to be practical, but think the costs of eking out a managable small amount of inflation in order to cut the costs of deleveraging too dfficult to manage without the Bank's credibility going to bits (will the man in the street really think it is just 5 years of 4 per cent?)

A very poor letter from Peter Johnson of Exeter College Oxford decries student tuition fees.  His statement that "fees skew educational choise and are generally societally regressive" ignores the evidence we produced: that the benefits of scrapping the fees will overwhelmingly go to richer families, since the existing system has a generous level of grants to poorer students, and poorer kids are generally unable to take up the chance of university because of prior low attainment. When he says "At the least let any fees be charged via PAYE coding over career earnings", he fails to spot that this is effectively how they ARE paid: students don't pay tuition fees, graduates do.  If you can't afford to (like the poets he mentions), you don't pay back.  The current terms are: 9% of earnings over £15,000 with no real interest costs - something that an embattled subprime borrower with a family to support would be envious of.

In a recession, do we really need more subsidy for cr*p poets?

http://gregmankiw.blogspot.com/2009/05/meltzer-vs-krugman.html