The only way is up

Today, the denial stopped - the UK has a serious inflation problem. Currently, the rate stands at 3.3 percent. The RPI rate is well over 4 percent. Underlying producer prices are growing at almost 10 percent. Food prices are out of control. Just thinking about fuel prices is enough to make you want to sell your car. No wonder inflationary expectations are rising.

If the Bank of England doesn't get a grip of the situation, inflation will probably hit 4 percent by the end of the summer. Once inflation hits 4 percent, then 5 percent doesn't look so far away. In fact, a rate somewhere close to 5 percent by Christmas is beginning to look like a real possibility. Then, in January, the UK starts its annual wage setting negotiations. By then, inflationary expectations will be running wild, the surge in inflation that we have experienced over the last few months, could well become deeply entrenched.

There is, thankfully, an alternative. It requires the Bank of England to immediately raise interest rates by 0.5 percent. The Bank has to demonstrate to the rest of the economy that it is serious about reducing inflation. Once price and wage setters understand that today's number was an aberration and the Bank will it out, expectations will stabilize and everything will calm down.