Inflation calms but care needed

By Evan Davis Economics Editor, BBC News

Slowing inflation makes an imminent interest rate rise unlikely

Phew. Panic over.

Inflation fell back today.

Indeed, the Consumer Prices Index (CPI), the main target measure of inflation, fell back to where it was two months ago.

The Retail Price Index (RPI) is still the wrong side of 4%, but did at least move in the right direction.

In all, today's figures make last month's unexpected jump in the inflation rates look a bit like a blip.

After all, the biggest upward impact on December's CPI (consumer price index) inflation figure, came from transport costs.

The biggest downward impact on January's CPI figure came from transport costs.

Similarly, on the RPI. The last set of figures carried a record monthly increase in furniture prices; today's RPI figures carry a record monthly fall in furniture prices.

Fuss about nothing?

You get the gist. It's a big relief.

And when last year's energy price rises fall out of the annual inflation rate later in the spring, inflation will head rapidly back to the 2% target, and it may easily fall below target later in the year.

We may even end up saying there was a fuss about nothing and we needn't have worried about the governor having had to write a letter to the chancellor.

My inclination though, is to say "not so fast..."

Remember those horror films, where you think the beast is slain, everyone breathes easily and relaxes, but just before the film is over, the monster finds a last gasp of energy to fight back once more.

Perhaps inflation will turn out the same.

After all, there were signs of inflationary pressure before the shock rise in inflation last month. Here are some of the facts:

Easy money

The latest evidence suggests the economy is growing fast.

Indeed, in the last three months, it has been growing at a roaring rate equivalent to 3.2% a year. (That is not official statistic, but a reliable estimate from the National Institute of Economic and Social Research).

The housing market may have reached a plateau, but still looks frothy. (Mortgage lending figures for December are down on November, but are still at a record level for a December.)

The trade deficit has reached record levels.

Pay settlements appear to have edged up in January, and the shops have reported buoyant trading conditions too.

Constant vigilance

Underpinning all this have been conditions of easy money.

The data for the latest three months shows money supply has been growing at an annual equivalent rate of 9.4% (That is slower than the 15% growth rates seen late last year, but is still quite a pace.)

This month's fall after last month's rise begs the question - do we overreact to monthly data? Evan Davis, BBC News economics editor Tell Evan your thoughts

Somehow, this does not feel like an economy that is struggling, or that is flat on its back.

For the Bank of England, which thinks more about where inflation will be in two years time, than in two months time, all of this data will probably still be paramount.

The message from the inflation figures is not that we needn't have worried. It's that the fight against inflation requires constant vigilance.