Time to worry about inflation?
Inflation is well above target - and well above where the Bank of England and others expected it to be not very long ago. That much we know. The big question is: should we worry?
Two different events this week seemed to suggest we should. The Organisation for Economic Co-operation and Development said in its latest economic outlook that the UK authorities, almost alone among the OECD, needed to be wary of losing their credibility on inflation. It even gave the Bank of England some free advice - to raise the bank rate to 3.5% by the end of 2011, starting "no later than" the last three months of this year.
The remarks were interesting because (a) the OECD doesn't usually give such specific advice to anyone, let alone to central banks; and (b) the text of OECD reports is always circulated well in advance to the countries concerned. This means someone at the Treasury was happy to see all this appear in print.
The other event was the release of the third estimate for UK economic growth in the first quarter of 2010. As expected, this was revised up slightly, to 0.3%. But the stand-out statistic on GDP wasn't the real figure - it was the nominal. These figures showed nominal GDP - the cash value of all transactions across the economy - growing by 2.1% during the quarter, or an annual rate of more than 8%.
The implication is that the GDP deflator - a measure of economy-wide inflation - rose by more than 1.7% in that period. That is partly due to the rise in VAT in January - but not entirely. Excluding taxes, prices across the economy rose 1.2% on the quarter, up from 1% in the fourth quarter of 2009 and 0.8% in the quarter before that.
The simplest explanation of these figures is also the most favourable to the Bank of England: quantitative easing worked. Just as the Monetary Policy Committee intended, pumping all that liquidity into the economy seems to have helped maintain nominal spending across the economy in the second half of 2009, even while the economy and the supply of bank credit were continuing to shrink.
But, as I have said in the past, there is still the lurking worry that coming out of this recession the UK could find itself getting less growth bang for every buck of nominal demand. To put it another way: the fear is that the balance between growth and inflation will turn out to be less favourable than before, and the Bank of England will need to put the brakes on the recovery sooner than it or anyone else had hoped.
For MPC members of a nervous disposition, it is not reassuring that the Bank - and so many independent city forecasters - have been getting their inflation forecasts wrong.
After all, they knew about the VAT change. They also, clearly, knew about the fall in sterling. These were incorporated in their forecasts, as was - at least partly - the rise in the price of energy. Yet still they were wrong.
More troubling, perhaps, inflation expectations are starting to drift up. Not massively. But worriers could definitely spot a trend.
The City, in general, still seems fairly relaxed. For all the muttering about the "Bank losing its grip", you're not seeing a big rise in City inflation forecasts, whether in the economists' formal predictions or embedded in the price of indexed gilts.
The relaxed school has plenty of big arguments on its side. For example: if you strip out the effect of tax changes, the annual rise in the consumer price index to April was much lower: 1.9%. If you also strip out energy prices, it was 1.4%.
Even if inflation expectations are ticking up, there's also little sign that workers are extracting higher pay rises. As Graham Turner, of GFC Economics, points out, IDS data for the three months to March show nearly a third (31%) of pay settlements involved a wage freeze.
More generally, it is clear that fiscal policy in the UK over the next few years is going to be sharply contractionary - rather more than the previous government had planned. The government is going to be contributing much less to overall demand, and keeping a tight grip on public-sector pay.
It is difficult to see how this feeds into a lot of domestically-generated inflation. But the big lesson of the past few years is that domestically-generated inflation is not necessarily the big concern.
Remember it was global food and energy price rises that pushed inflation up to 5.2% in September 2008, leaving some members of the MPC still talking about needing to raise UK interest rates, just weeks before Lehman Brothers went bust.
Today's high inflation doesn't necessarily tell us much about what inflation will be tomorrow. But it does bring home two deep - and somewhat uncomfortable - truths about the global economy and Britain's place in it.
One is that "re-balancing" - learning to sell more to the rest of the world - is no free lunch.
There is much rejoicing that we are not in the euro: and rightly so. It means we can use a cheaper currency to price ourselves back into the global market. But to boost our international selling power - and the competitiveness of UK workers - our purchasing power has to take a hit. Prices go up, but wages must not. Or not as fast.
Coming out of this process, our companies should be more internationally competitive. But we shouldn't delude ourselves: the pound in our pocket will be worth less. We will not be able to buy as much with it as we did before. Indeed, not buying as much as before is rather the point.
The other big truth about the world today is that in many global commodity markets we are not price-makers anymore - we are price-takers.
In the old days, demand from advanced countries like the UK used to set the price of steel, oil, food and the rest. Now - not so much. Now, demand from the emerging economies can play an equally large role - especially since their growth is more commodity-intensive; look at China.
HSBC's Chief Global Economist Stephen King spells out in more detail what this shift in global economic power could mean to all of us, in his scary but excellent new book, Losing Control.
In the meantime, we can comfort ourselves that domestic inflation is still - more or less - under the Bank of England's control. Even in a globalised world, the bank can still, in the end, control the amount of money flowing through the economy, which means it can stop inflation taking off as well.
But the Bank of England can't make the path out of this crisis an easy one. And it can't reimburse us for all that we have lost. Quite the opposite: it has to make sure that all of us - collectively - take a hit.