A surprise? Definitely. A problem? Possibly
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.
Update, 15:53: Many of you have disputed that today's inflation numbers were a surprise.
Let me be clear: it is no surprise, to anyone, that inflation is well above target and has been for months. The surprise I was referring to was micro. City forecasters, on average, thought the March figure would be 3.1%. In fact it was 3.4%. Surprise.
You might put this down to a lot of overly optimistic city economists. But, as Samanthav (comment 13) notes, it's not just city forecasters, it's the Bank of England too.
Mervyn King was been preparing us for above-target inflation since the end of last year. But that isn't what he or the Bank of England expected a year ago. In its February Inflation Report, the MPC forecast that CPI inflation in the first three months of 2010 would be 1.3%.
Since then, the economy has grown by less than the Bank expected, and sterling has gone up - all things you might have expected to push down inflation. But CPI inflation in the first quarter of this year has been 3.3% - some 2% higher than the Bank expected.
According to Michael Saunders, at Citigroup, this is part of a familiar pattern. In fact, he reckons that CPI inflation has been above the Bank's forecast of 12 months earlier in 17 of the last 20 quarters.
There's a chart to make the point. It's a version of the one I used earlier, but it goes back two years, and uses the MPC forecast of 12 months earlier as the comparison, rather than City forecasts.
Are there more inflation "surprises" to come? The facetious answer would be no; after all, the more often inflation overshoots, the less surprising it will be.
But here's an interesting twist for the many pessimists who seem to read Stephanomics. On Friday we get the preliminary estimate for growth in GDP in the first quarter o 2010. These have tended to surprise the other way - with growth much weaker than city analysts expected.
On the day, I have often discussed why many city economists expected them to be revised up (something some of you have dismissed as government propaganda.)
Now, at least one of those surprising figures - the first estimate for the fourth quarter of 2009 - has now been revised up, from +0.1% to +0.4%. But all of the first three versions of the GDP figures are based on output numbers, and those have still been consistently weaker than the figures for expenditure (one of the other ways to measure GDP).
That is why some city economists - and the Bank of England - expect the GDP data to be revised up even further over the next two years, as the ONS brings all the data sets together.
Why does this matter? It matters because if the recession was shallower than we thought - or the early months of the recovery stronger - then that would mean there was less spare capacity in the economy after all.
Depending on what happens to UK budget policy in the next six months, that's another reason to wonder whether fear of inflation will force some negative surprises from the MPC.