"The Bank has room to act," says James Knightley at ING Bank. Economists aren't sure what form such action would take. Some think the Bank could issue "forward guidance" - a promise to keep interest rates low for a specified time. That would be another blow to hard-pressed savers, although the lower prospective inflation which prompts it would offer some relief. But others are looking for more quantitative easing; Victoria Clarke at Investec expects another £75bn of it by the end of this year.
This week's figures appeared to bolster hopes of lower inflation, with consumer price inflation dropping to 2.4 per cent, a seven-month low. But economists say this is only a temporary fall. Most expect it to rise in the next two months, as falls in utility bills and petrol prices last year fall out of the annual inflation rate.
Many expect it to stay above its 2 per cent target for a long time. "It's unlikely that CPI inflation will dip below 2.5 per cent before 2016," warns Peter Spencer at Ernst & Young's Item club. This is partly due to increases in state-administered prices which monetary policy cannot control. Rises in university tuition fees, postage charges and utility bills contributed 0.83 percentage points to CPI inflation last month, implying that without these inflation would actually be well below target. With wage inflation at its lowest rate since records began in 2001 and retail sales falling 1.3 per cent last month, two common causes of inflation are absent.
One problem, though, is that labour productivity is still stagnating. This implies that any wage growth at all adds to employers' unit costs and so is potentially inflationary - a problem which would be exacerbated if employment were to rise as fast as output. Brian Hilliard at Societe Generale says any significant fall in unemployment "risks boosting inflation".
