Is Britain going to inflate away its debt problems?

It's that time again - the first Thursday of the month is fast approaching, the day when the Bank of England's Monetary Policy Committee decides whether to twist or stick on interest rates. Many are predicting another reduction, though with the rate currently at 1% there is nowhere much to go - zero interest rates could at last be here. Appealing though 'free' money is (though borrowers always pay a premium above base rate, as I am painfully reminded every time I look at my mortgage payments) there is a price - inflation.

But hang on, wasn't inflation last year's thing. A spotcheck of the financial news surely confirms that the only pressures on the economy are deflationary (alongside deflation's baleful cousin, deleveraging or degearing). The Dow sliding below 7000 points for the first time in 12 years; the FTSE 100 plummeting below 3700 to levels last seen five years ago; AIG and HSBC announcing record losses; UK manufacturing output falling for the tenth month in a row. And not least, the continuing stagnation in the housing market, with selling prices dropping like a stone. Many observers worry that the enormous fiscal stimulus (both the UK and US governments pouring money into the economy through quantitative easing (printing banknotes in effect) and using the resultant cash to buy up debt and invest in capital projects), combined with monetary easing (the cut in interest rates) cannot be other than inflationary.

At the moment, the governments are merely trying to halt the decline, but the aim is of course to reflate the economy. The difficulty is, once the medicine starts to work, controlling the beast of inflation. Many countries have a visceral fear of inflation. From the Tory years of Margaret Thatcher it was seen as the great evil, eroding the value of savings. The Germans of course have the horror of 1920s' hyperinflation seared into their psyche. But nobody seems too bothered about the poor old savers at the moment. Despite being the prudent souls who saved their pennies while the rest of us lived on credit, and borrowed to fuel the property bubble, they are now getting punished, by seeing the interest on their savings slashed - to nothing if the Bank's MPC does cut again this week.

But maybe there is a sinister method to the madness. If inflation does kick in, it will not simply be a sign of the economy getting moving again, it will also handily deal with the asset bubble. All those overpriced properties sitting on the market will soon look a whole lot more affordable as a healthy dose of inflation cuts the real cost of a £200,000 apartment. Price falls will do their bit to bring sellers and buyers back to a meeting point - but maybe our governments are relying on inflation to do the rest.