Since the credit crunch began last August, the Bank of England has been forced into an increasingly difficult balancing act between the conflicting pressures of faltering growth prospects, and escalating price pressures.

Today’s shockingly bad inflation figures have turned that unenviable undertaking into a true high wire act.

With inflation on the consumer prices index already at 3 per cent, it is virtually inevitable that - after steep increases in the cost of petrol so far in May - it will next month nudge over the 3.1 per cent level that will force Mervyn King, the Governor of the Bank of England, to pen only his second ever explanatory letter to the Chancellor, detailing why the pace of price increases is running a full point faster than the Bank’s 2 per cent goal.

Mr King had better keep his pen at the ready as his revival of the lost art of letter writing is likely to be swiftly repeated.

If inflation remains at 3.1 per cent or higher for 3 months he is obliged to write another mea culpa to Alistair Darling. It seems probable that the Governor may end up penning three such letters before the year is out.

For the millions of households facing the present steep increases in the cost of living, today’s elevated inflation numbers are a measure of growing financial stress and discomfort, and for some of severe economic pain and distress.

That can only add to the woes of an embattled Government under Gordon Brown, whose reputation for sound economic management over the past decade is rapidly unravelling. For the Prime Minister, this cannot bode well for the fate of his struggling administration.

But what do today’s grim figures imply for the rest of us? What do they tell us about the path of inflation itself, living costs, economic growth, and interest rates?

First the good news. Inflation will in all probability soon peak and start to fall: it should by now have almost reached its apogee. It will take some time for it to drop substantially from its present levels, but by early next year it should be back at more tolerable rates.

One reason for this is that prices would have to rise even faster than they are now doing for inflation to remain so high. That seems pretty improbable.

But the really bad news is the key reason why inflation will relent into next year - and that is the scale of the impending economic slowdown.

Today’s grim news of the worst housing market conditions for three decades, and of a second month of weak or falling high street sales, are an omen of tough times ahead.

As the economy weakens, as the Bank itself intended, this will bear down hard on price pressures. Unemployment will start to creep up, ensuring that pay pressures remain in check. And households struggling with bigger bills will retreat from the high street, forcing retailers to compete hard on prices to entice shoppers to spend. There were already signs of this today as clothing prices tumbled amid aggressive discounting.

The Bank knows all of this, so it should swiftly scotch the inevitable wild talk of interest rate rises or other radical action that will be triggered by today’s news.

Still, a June cut in rates that had seemed very likely is probably now off the table, and the anxieties of the Bank’s Monetary Policy Committee over its severe inflation headache may even be enough to keep base rates on hold for the rest of the year.

That would almost certainly be a grave mistake.

Understandably, the MPC fears that the steep increases in living costs now being endured will spark steep wage demands, and that rising pay will then lead to still steeper price rises, triggering a wage-price spiral and so entrenching inflation in the economy.

These justifiable but misplaced worries show no sign of being fulfilled but are likely to be enough to limit rate cuts as the Bank feels obliged to talk, and to act, tough as its strives to prevent high inflation expectations become a self-fulfilling prophecy, and such fears becoming reality.

Some show of strength is undoubtedly necessary to cement the Bank’s inflation fighting credibility with the markets and the public. That will come tomorrow, when Mr King unveils the Bank’s quarterly Inflation Report.

The big risk, though, is that a hardline from Threadneedle Street leads to a hard landing for the economy. Instead of acting pre-emptively to forestall a severe downturn, the MPC may now stay its hand for too long. That will guarantee that inflation abates. It will also ensure a very painful 2009 for the economy and for Mr Brown, and make recession a clear and present danger.

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