Official interest rates will rise this year, futures markets believe. Short sterling contracts are now pricing in a three-month Libor rate of 6.3 per cent for December, 0.4 percentage points above the current rate. This suggests that traders expect two quarter-point rises in interest rates before Christmas.
There were signs this week that inflation is accelerating in figures, showing that manufacturers' input prices are rising at their fastest annual rate since 1976, and output price inflation is at its highest since 1982. And Bank of England governor Mervyn King will have to write to the chancellor next week to explain why consumer price inflation is more than a full percentage point above the two per cent target.
Furthermore, recent evidence suggests that the economy might not be slowing down sufficiently quickly to dampen inflation. Although the National Institute of Economic and Social Research reported this week that its estimate of GDP growth slowed in the three months to May, official figures show that manufacturing output is growing at its (albeit low) trend rate, and the British Retail Consortium said that high street sales recovered last month, with overall spending growing 4.6 per cent in the 12 months to May.
A further concern for the Bank is that its anti-inflationary credibility is in doubt; sterling has fallen 10 per cent in a year, and gilt market inflation expectations are at their highest since the Bank was made independent in 1997. Some economists fear that the Bank might raise rates merely to remind markets that it is serious about controlling inflation.
Other economists, though, believe that the futures markets are wrong, and that the next move in official rates will be down. Jamie Dannhauser at Lombard Street Research says that the Bank will "talk tough, do nothing". One reason for this is that the mere expectation of higher official rates could be enough to cool the economy.
Also, one important cause of inflation is still behaving well - wage growth. Average earnings rose a mere 3.8 per cent in the year to April, and this measure shows no sign of rising. In normal times, this is consistent with inflation staying below target, which suggests that the inflation threat is not spreading to the wider economy yet.
