Returning holidaymakers who have had no access to newspapers or BlackBerrys for the past fortnight may wonder whether their aircraft has delivered them into a parallel universe, subtly different from the one they left a fortnight ago. Most things are still the same. Heathrow is still losing people's baggage, bankers are still losing their shirts, Olympic sports commentators are still losing all sense of proportion.

But economic sentiment is markedly different from a few weeks ago. Then, all the talk and all the concern was over inflation. Now, all the talk and concern is over recession.

Then, the worry was that interest rates might still have to be raised, both in the UK and in the eurozone. Now, the talk is about how quickly they might be cut.

Then, the pound bought close to two bucks. Now, it buys $1.85 and is falling. Then, America was shunned by all right-thinking investors. Now, the US is suddenly the place to park spare cash.

The strange thing is that actual recent inflation figures across the world are every bit as bad as the very worst expectations. Other things being equal, the latest news on consumer prices would have the Bank of England itching to push up interest rates. Other things are not equal, however. First, virtually every energy and commodity price has been tumbling. That should help to reduce price pressures in the shops in six to nine months.

However, it is the darkening economic outlook that has so altered the stance of policymakers. Bluntly, the impending downturn is now supposed to be so abrupt and so deep that companies, fearful of losing customers, won't dare put up their prices, and employees, fearful of their jobs, won't dare ask for higher wages.

That may prove true. It is certainly a convenient theory for policymakers to cling to if the alternative is to put up people's mortgage bills. However, inflation, once entrenched, is a stubborn beast to budge. Firms with strong market power or customer franchises will not be content with raising their prices by only 2 or 3 per cent. Thomas Cook talked ominously this week of lifting holiday prices by 8 per cent in 2009, four times the official target rate for UK inflation. Every dip lower in the pound, although helpful for exporters, adds to companies' cost pressures.

The inflation dragon has not been slain. We are merely choosing to worry about other things.

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