HOWZAT

So pipeline inflation pressure is starting to ease. In addition, all six of the main energy companies have announced their big price rises, to take effect either in August or September. That means a higher inflation peak than King expected in June, but also an earlier one.

It is difficult to overstate the importance of inflation peaking soon and then falling. Sharply rising prices of essentials have a bigger direct impact on most families than restrictions on the availability of credit. Falling inflation will ease the squeeze on the growth in real incomes, though not by enough to offer retailers genuine Christmas cheer this year.

A monetary policy committee confident in its forecasts should have no qualms about cutting interest rates when inflation is high and rising, but that is not how it appears to work. It is no accident there has been no cut in Bank rate since before King’s June letter. The last one was in April.

The Bank wants to be sure inflation is falling and that inflation expectations have not moved permanently away from the 2% target. Its own survey of such expectations, carried out by NOP, was published last week and contained mixed results.

The bad news was that people think inflation is 5.4%, the highest since the question was first asked in 1999, and above even the rise in the retail prices index (5%), let alone the CPI. Expectations are important, but mainly reflect what is happening now. As inflation falls, so will expectations.

The good news is that people expect lower inflation, 4.4%, over the next 12 months and that by a huge margin, 76% to 3%, are committed to low inflation, believing the economy will be weaker if it is allowed to take hold. Though Bank rate has fallen, people think by 63% to 7% that rates have risen. That is the credit crunch for you.

What are the risks that September will be a false peak and that inflation is more ingrained than the Bank believes? Sterling’s fall from $2 to $1.75 deprives consumers of some of the benefit from the falling price of oil and commodities, which are denominated in dollars. Imported inflation is a danger, though weak demand should limit firms’ ability to pass on higher import prices. Not only that, but China’s inflation rate has dropped from 9% to below 5%.

Food prices are a risk, in the light of the dreadful summer and reports of very poor grain harvests in Britain. In general, though, such prices are set globally.

Finally, higher wages are a danger, not to inflation itself — we no longer think in terms of a wage-price spiral — but if they were to constrain the Bank from cutting rates. That would make King’s adjustment even more painful. So far, settlements are remarkably subdued, which is good. They should remain so as unemployment rises. But with the unions getting restive the Bank will be watching.

PS: So who won the bizarre credit-crunch headline competition? First a detour. John Longley sent a collection of photos doing the rounds on the internet, including the Queen moonlighting at McDonald’s and a Dragons’ Den judge with a “golf sale” placard. I think they are mock-ups but you can never be sure. Andrew Zazzi was tempted by a £3.50 “all you can eat” Credit Crunch Brunch.

Many headlines talked of the problems the credit crunch was causing for pets. But, unless we’ve missed it, the iconic “Credit crunch ate my hamster” has yet to appear. Rohan De Silva sent in a formidable collection of genuine headlines, including “Credit crunch could fan fires”, “The credit crunch and other biscuits”, “Cheap chic — how to look hot during the credit crunch”, and “Boating floats on credit crunch”.

The prize of a copy of The Subprime Solution by Robert Shiller goes to David Griffiths. Apart from “Noel Gallagher untroubled by credit crunch woes” and “Credit crunch desperation could be costing motorists their health”, I liked a simple headline for our times: “Estate agent turns to prayer to beat credit crunch”.

david.smith@sunday-times.co.uk