The Bank of England's MPC made an extraordinary admission in the minutes of their most recent meeting. The committee acknowledges that inflation has been higher than they expected.
More ominiously, the committee tentatively suggested that the supply side potential of the economy may be lower than previously realized. Bringing rapid monetary growth together with a significant supply contraction and its means only one thing - inflation.
I know that it is hard to see it right now, but inflation is heading our way. Even the MPC are now hinting at the impending catastrophe.....
"Despite the latest fall, inflation had been surprisingly high over a number of months given both the VAT cut and the large degree of slack that the Committee thought had opened up in the economy. CPI inflation was higher than in the other major economies. The depreciation of sterling was, plausibly, one factor that helped to explain this. Indeed, the profile of CPI inflation in the United Kingdom was similar to those in a number of other developed economies that had recently experienced large exchange rate depreciations. But it was also possible that those factors that were pushing down on inflation, including the recent rise in the degree of slack in the economy, were taking longer than expected to influence the path of inflation.
Another potential factor that could explain the resilience of inflation was that the supply potential of the economy may be lower than assumed. Economies that had had significant financial crises in the past seemed to have suffered large and persistent supply contractions. The Committee had already assumed in its May Inflation Report projections that the growth of potential supply was likely to weaken considerably. But it was impossible to judge the scale and timing of any effects from the current financial crisis and the recession on the UK supply side with any precision."