Colleagues of a frugal émigré working at the London School of Economics in the 1950s were puzzled by his eccentric dress. He was still wearing wing collars at least a generation after they had been dropped for normal dress as, literally, too stuck up. During the German hyperinflation of 1923, he explained, his mother was so desperate to get rid of her cash income that she bought a gross of wing collars, the only goods available before the money became worthless. During that episode, consumer prices multiplied 7.2 billion times in 16 months as the Government printed money to finance its spending promises in a ruined economy that raised little tax and had no credit to borrow.

Even this lesson was lost on some fools and desperate men. Hungary repeated the experience with extra noughts after the Second World War. When communist Yugoslavia broke up, the Serb rump printed money to finance its army’s campaign to grab it back. What cost one dinar in 1990 required an estimated 100 billion billion by 1994.

When inflation is that high, it is a bit of a guess. No wonder Moffat Nyioni, head of Zimbabwe’s Central Statistical Office, postponed publication of figures showing a monthly price rise of more than 50 per cent, a benchmark for hyperinflation. Inflation already topped 3,000 per cent annually, which means that many prices do not stay still long enough to count.

Gideon Gono, Governor of Zimbawe’s Reserve Bank, has taken it upon himself to print money to finance expenditure essential to the functioning of a state where most urban workers are unemployed. He dismisses “ancient textbook economics” as irrelevant to local conditions and paused only when the presses ran short of paper and ink.

Such rashness puts into perspective the 3.1 per cent rise in the UK’s Consumer Prices Index (CPI) in the year to March, and even the 4.8 per cent rise in the cost of living index, the measure used before 1997. But they do have one thing in common: they are both the result of taking risks with money on the back of wishful thinking.

None of the central bankers who have presided over hyperinflation imagined doing so. They thought they were helping to tide their country over short-lived difficulties that would soon be resolved, only to find that confidence was lost, first in themselves, then in money, exacerbating the country’s initial plight.

Mervyn King has only one vote on a Monetary Policy Committee of nine, which has split into camps. He has had to write the open letter after inflation strayed above its target by more than half, but its smug tone may convey MPC majority thinking.

The MPC sought to shield the UK economy from the shock of a surge in oil, gas and metal prices. In terms of output, it has succeeded, so far. But the Governor always claimed that the high oil price would have to be paid for in lower real pay and profits, or lower growth and fewer jobs, if it were not be to inflationary.

So far, this has proved to be wishful thinking. Instead of domestic business absorbing much of the higher global raw material costs, inflation has been gathering pace in most CPI sub-sectors, especially labour-intensive services. The exceptions are mainly where prices are held down by imports, not least from China. Inflation tops 3 per cent in most main divisions of the CPI and has done for months.

Risks to inflation were also greater than risks to output. The economy has been expanding at or above its sustainable rate for years and is at full capacity. The MPC has relied on the proposition that the surge of skilled migrants since the 2004 EU enlargement will continue, preventing inflationary labour shortages. Predictably, earnings growth in the private sector has risen past the level once seen as the danger signal. Whatever happens to the annual rate this year, inflation pressure is rising as you would expect at the peak of a cycle.

The letter insists that the MPC has no duty to keep CPI rises within 1 per cent either side of its target. That legalistic assertion will undermine the MPC’s carefully built credibility more.

If people cannot rely on inflation staying within a 1-3 per cent range, other than in exceptional circumstances, they will revert to thinking of the current rate of inflation as what to expect in the future. If they did, people should be looking for at least 5 per cent pay or price rises. Persuading us that inflation will be near to target in future, whatever it may be today, was the main achievement of the MPC’s first decade. It has allowed us to keep employment higher and raise real incomes faster.

Present MPC members, both inside and outside the Bank, seem to take that for granted. Their wishful thinking has hurt their credibility. Faith needs to be rebuilt, at greater cost to the economy than if the MPC had chosen caution over risky fine-tuning.

The latest rise in Bank Rate, in January, was voted only by five to four. A rise early next month seems certain. There is a case for a half-point rise, at least for a while, to admit that the Bank messed up and does not intend to do so again. But strong sterling may be worth a quarter-point. It is more important that the vote next time should be unanimous. Anything less will damage confidence severely.

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