The first thing is to get a sense of perspective. This is not 1975. We are not contending with curly perms, flares and the Bay City Rollers. Inflation is not 25 per cent. It’s 3.3 per cent.

True, it is rising. Mervyn King, the Governor of the Bank of England, cautioned that it would top 4 per cent by the end of the year. And for many people it already feels worse than that. Food inflation is running at double that rate, petrol has risen by 20 per cent in the past 12 months and some experts say that energy bills could jump another 40 per cent this year.

Such rises can mean a painful cut in money left over for non-essential spending, particularly for those on fixed incomes. For those who remember the bad old days of the 1970s there are ominous echoes. Back then, high inflation fuelled by an oil price shock combined with a slow-growing economy to give us “stagflation”. Now we have suffered another oil price shock and are looking at economic growth grinding to a near-halt next year. The doomsters worry that rising prices will push up wages, feeding through into further price rises. In the 1970s this led to an inflationary spiral with wages rising by 32 per cent a year at their peak, compared with inflation of 26 per cent.

But there are key differences. For a start, one very important price is not going up — housing. As homeowners start to feel poorer, they should rein in their spending. There is already talk of a supermarket price war.

Meanwhile, some of the factors that have helped to give us years of low inflation are still in place. In particular, dwindling trade union militancy has reduced the threat that price rises will quickly pass through into wages. So far the signs are encouraging. Recent settlements have been modest. But with unemployment still low, employees will feel in a strong position to push for increases that maintain their living standards.

The key may be what happens to public sector pay, which in turn will depend partly on the Government’s resolve. The other reason to be optimistic about inflation is that the Bank of England has signalled its determination to do what it takes to curb inflation, including raising interest rates again this year.

That means there is a good chance that inflation, unlike the Bay City Rollers, will just fade away.

Explore Economics

• Pre-Budget Report 2008

• Budget 2009

• World Economic Forum

• The Times MPC

Times Recommends

• C&G axed - 1,660 jobs to be lost
• UK house prices rise 1.1% as buyers return
• Mixed reaction to US banks repaying bailouts