THE August sun has been beating down and the driving season is in full swing. And, oh yes, oil prices have been hitting record highs again, topping $65 a barrel.

The driving season, usually thought of as an American phenomenon, kicks off on the Memorial Day holiday weekend in late May and lasts until Labor Day in early September, when American motorists take to the highways in large numbers in search of rest and recreation. But it is also a European thing and, judging from my recent experiences on our crowded motorways, one we embrace enthusiastically here, even with petrol at 90p a litre.

Its significance is that it is associated with strong demand for oil, putting pressure on limited refining capacity. Everything, in fact, seems at present to be conspiring to push up oil prices. The driving season gives way to autumn and winter heating demand. If the weather is cold, oil demand increases; if global warming makes it hot, turn up the air conditioning.

Our appetite for oil continues unabated in spite of record prices. The eastward shift of the global economy and rising demand from China, with its 9.5% growth rate, is another seemingly permanent oil-price booster.

I will return to that in a moment. The big domestic economic news this month, however, has been generated by the Bank of England, first by cutting base rate from 4.75% to 4.5% on August 4.

Then last week, Mervyn King, the Bank’s governor, presented a new inflation forecast that offered little encouragement to the interest-rate doves. If the Bank’s forecast turns out to be correct, the monetary policy committee (MPC) will see little need to cut rates further.

There are some serious questions about that forecast. Growth over the past 12 months has been roughly half what the Bank expected last summer, yet it persists in predicting an early bounce-back in activity — from where is not entirely clear.

That was not the only curiosity. King has stressed that the Bank can achieve as much when not cutting rates as when it does, as long as people expect it to do so. The prospect of a succession of cuts could have cheered up households, encouraging more spending, so minimising the need for the MPC actually to make those cuts. Last week’s signals went against that spirit.

The Bank, it should be said, will always have a built-in bias towards saying that the present level of interest rates is right. Otherwise, why not change it immediately? To me, however, the big issue has been oil. Inflation, on the consumer-prices-index measure targeted by the Bank, stood at 2% in June, exactly in line with the target. A year earlier it was 1.6%, three months before that just 1.1%.

What has caused this rise? The Bank offers two competing views. One is that inflation has moved up because of pressure of demand. Firms, in other words, have got back some of their pricing power because of the strength of the economy. The other explanation is oil. In just over two years, oil prices have gone up from the mid-$20s to more than $60 a barrel. Petrol has risen from under 70p a litre to more than 90p. In this context, the surprise is not that inflation has risen but that it has risen so little. At a time when world oil prices have more than doubled, 2% inflation is a minor miracle.

And last week’s inflation report offered no definitive answer on this, something I would want as a priority if sitting on the MPC. Is it really plausible that the strength of demand has pushed up inflation? Not according to retailers, who say consumer demand has been weak.

So we should look to oil, both for its effect on inflation — “core” inflation, excluding energy and seasonal food, is running at only 1.5% — and its impact on growth. Part of the slowdown we have seen in Britain is due to the fact that high oil prices act as a tax on growth. The more people and businesses spend on energy, the less they have for other things.

Petrol prices have yet to reflect the impact of the latest rise in crude oil. Gas and electricity bills will rise further over the winter. As the Bank said, the current inflation rate of 2% is unlikely to represent the peak.

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