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Inflation has surprised everyone again. Is it a problem? The best guess is: probably not. But the judgement is more finely balanced than the Bank of England would probably want, in an economy with so much spare capacity.
The best medicine for the UK - and its public finances - right now is economic growth. The Monetary Policy Committee does not want to have to crimp that growth due to keep the lid on inflation.
How great is that risk today? The target measure of inflation - the Consumer Price Index (CPI) - rose by 3.4% in the 12 months to March, up from 3% in February, and well up on market expectations of around 3.1%.
A lot of that increase is due to what economists call "base effects": utility bills were falling sharply in the first months of 2009. The headline CPI automatically goes up, when those declines fall out of the index (especially with energy bills now going up quite sharply). Food prices have also gone up, in part due to the falling exchange rate.
Many - even most - of the factors driving up inflation ought to be temporary. Retailers have also been passing on some of the effects of VAT going back up to 17.5%. But, as ever, it is striking that UK inflation seems to be surprising on the upside more often than not.
That is why most forecasters do not expect the Bank to be overly worried by these figures.
However, according to Neville Hill of Credit Suisse, in the past year CPI inflation has surprised forecasters to the upside more than twice as often as it has surprised on the downside.
You might see that as a sign of bad - or at least over-optimistic - forecasting.
But Mr Hill notes that core inflation is not coming down very quickly at all - last month it was 2.5%, down from 2.6% in February. Services inflation has actually gone up, to 3.3%.
On this basis, he says "it's not evident that spare capacity in the economy is still bearing down on domestically generated inflation".
If true, that would be cause for concern indeed. I'm not sure I would be so gloomy on the basis of the figures we've seen so far. I'm not sure the Bank would be either. Mervyn King has always said he expected CPI inflation to be above target for most of 2010.
But I do know that the MPC is keeping a very close eye on inflation expectations - and pay settlements - to see whether the higher headline rates of inflation in the past few months are becoming self-perpetuating.
There is not much sign of that so far. But as I noted a while ago, the GDP data for the fourth quarter of 2009 showed economy-wide inflation - known as the the GDP deflator - running at an annualised rate of 4%.
That could be a tribute to the success of QE (quantitative easing). It's not dangerous, in and of itself. But it will not be lost on international bond investors that prices across the economy are rising faster than in almost any other major developed economy.
Investors also know that the UK government has more to gain from an unexpected bout of inflation than almost any other economy.
That is because - like the US - a lot of our government debt is held abroad, meaning that they, not UK citizens, pay some of the price of a fall in the real value of UK debt. In addition, unlike the US, the average maturity of our debt is exceptionally high (see earlier Greek Britain? post). So, in the short-term, the benefit of higher inflation - in terms of reducing the value of our overall stock of debt - might more than outweigh the fact that the markets would demand a higher interest rate on our debt in the future.
None of this is to say that inflation is likely - let alone desirable. But it is more of a live issue than the Bank or anyone else would like it to be, so early in this economic recovery.
This article is from the BBC News website. ? British Broadcasting Corporation, The BBC is not responsible for the content of external internet sites.
The best medicine for the UK - and its public finances - right now is economic growth. The Monetary Policy Committee does not want to have to crimp that growth due to keep the lid on inflation.
How great is that risk today? The target measure of inflation - the Consumer Price Index (CPI) - rose by 3.4% in the 12 months to March, up from 3% in February, and well up on market expectations of around 3.1%.
A lot of that increase is due to what economists call "base effects": utility bills were falling sharply in the first months of 2009. The headline CPI automatically goes up, when those declines fall out of the index (especially with energy bills now going up quite sharply). Food prices have also gone up, in part due to the falling exchange rate.
Many - even most - of the factors driving up inflation ought to be temporary. Retailers have also been passing on some of the effects of VAT going back up to 17.5%. But, as ever, it is striking that UK inflation seems to be surprising on the upside more often than not.
That is why most forecasters do not expect the Bank to be overly worried by these figures.
However, according to Neville Hill of Credit Suisse, in the past year CPI inflation has surprised forecasters to the upside more than twice as often as it has surprised on the downside.
You might see that as a sign of bad - or at least over-optimistic - forecasting.
But Mr Hill notes that core inflation is not coming down very quickly at all - last month it was 2.5%, down from 2.6% in February. Services inflation has actually gone up, to 3.3%.
On this basis, he says "it's not evident that spare capacity in the economy is still bearing down on domestically generated inflation".
If true, that would be cause for concern indeed. I'm not sure I would be so gloomy on the basis of the figures we've seen so far. I'm not sure the Bank would be either. Mervyn King has always said he expected CPI inflation to be above target for most of 2010.
But I do know that the MPC is keeping a very close eye on inflation expectations - and pay settlements - to see whether the higher headline rates of inflation in the past few months are becoming self-perpetuating.
There is not much sign of that so far. But as I noted a while ago, the GDP data for the fourth quarter of 2009 showed economy-wide inflation - known as the the GDP deflator - running at an annualised rate of 4%.
That could be a tribute to the success of QE (quantitative easing). It's not dangerous, in and of itself. But it will not be lost on international bond investors that prices across the economy are rising faster than in almost any other major developed economy.
Investors also know that the UK government has more to gain from an unexpected bout of inflation than almost any other economy.
That is because - like the US - a lot of our government debt is held abroad, meaning that they, not UK citizens, pay some of the price of a fall in the real value of UK debt. In addition, unlike the US, the average maturity of our debt is exceptionally high (see earlier Greek Britain? post). So, in the short-term, the benefit of higher inflation - in terms of reducing the value of our overall stock of debt - might more than outweigh the fact that the markets would demand a higher interest rate on our debt in the future.
None of this is to say that inflation is likely - let alone desirable. But it is more of a live issue than the Bank or anyone else would like it to be, so early in this economic recovery.
This article is from the BBC News website. ? British Broadcasting Corporation, The BBC is not responsible for the content of external internet sites.