The sharp pick-up in inflation was effectively telegraphed by the Bank of England Governor, Mervyn King, at his quarterly press call last week. But even so it was notable that sterling perked up immediately on publication of the data.

Whatever the Governor may say, the market is getting increasingly twitchy about a possible pick-up in inflation, while it has certainly concluded that the Bank is near the end of its quantitative easing programme.

But is the beast of inflation back? No, says the Governor. He expects spare capacity in the economy to bear down on inflation, even though it will rise into early next year, with the increase in VAT due on New Year’s Day possibly sending CPI inflation above 3 per cent — the level at which the Governor must write a letter of explanation to the Chancellor.

The Governor will also take great comfort from the fact that RPI, which is used most commonly in pay negotiations, is still negative. That supports the CBI’s forecast this week of another year of pay freezes.

But there is still cause for concern. The Bank’s forecasts for inflation this year have regularly been lower than the eventual outcome. Especially worrying is the fact that core inflation, which strips out volatile energy, food, alcohol and tobacco prices, remains “sticky”. It stands at 1.8 per cent and will go much higher after the VAT rises. This, in turn, may push up inflation expectations — always something the Bank worries about.

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