A Bank of England chart showing the likely course of inflation over the next two years was taken as a broad hint yesterday that one more interest rate increase is in the offing, to raise the official rate to 5.5 per cent.
This chart – showing inflation falling fast for the rest of this year then picking up to hit Chancellor Gordon Brown's two per cent target almost exactly in mid-2008 – was based, like those in other recent Bank reports, on money market expectations.
Mervyn King, the governor, pointed out that these at present point to a quarter-point increase.
But he also stressed that the chart indicated wide risks to the "central projection". In the short run the greater likelihood was that inflation will fall well below the target this year – possibly down to one per cent or less to judge from the chart.
Longer-term, the balance of risk was on the upside, with inflation bouncing back sharply next year, possibly beyond three per cent.
"The chance of central projection actually coming true is very close to zero," Dr King insisted, presenting the Bank's latest quarterly Inflation Report.
Commenting on news that inflation had turned down more than expected in January, he warned: "It is not a time for counting chickens."
He then added: "Just as three per cent inflation in December did not mean the end of the world is nigh, so 2.7 per cent in January does not mean we can ignore concerns about inflation ahead."
Dr King revealed that the Bank makes no formal projection for the Retail Prices Index, the measure of inflation that remain the basis for the state pension and some other benefits and is used as a benchmark in many pay negotiations.
This reached 4.4 per cent in December, before edging down to 4.2 per cent last month.
The question of when the Bank is likely to make the expected increase divided City economists.
"We are sticking with our call for a quarter-point rate increase at the March meeting," said Alan Castle, UK economist at Lehman Brothers.
Malcolm Barr, his counterpart at JP Morgan, differed. "The Inflation Report leaves the MPC biased to raise rates, but sensitive to risks around both sides of the forecast," he said.
"We are changing the forecast which had shown rates rising to 5.5 per cent in April to show that increase taking place in August."
Dr King was non-committal about the likely outcome of the present wage round, despite early evidence that average earnings and pay settlements appear to be subdued so far.
It was too early to draw firm conclusions about wages, he said, particularly as fewer people than before were subject to collective trade-union agreed New Year pay rises.
The Bank's report indicated that Britain's economic growth rate will peak above three per cent in the middle of this year before easing back to around 2.8 per cent in two years' time as both government and consumer spending slow.
It said the recent easing of the labour market, as unemployment crept back up, may be coming to an end. Official statistics showed the number of people claiming unemployment benefit fell in January more sharply than for nearly three years. The degree of slack in the economy is an issue that divides members of the Bank's committee.
"One camp believes there is a significant degree of spare capacity in the economy and have lower projections in their mind for growth and inflation," said Karen Ward, UK economist at HSBC.
"The other camp are considering different indicators with more focus on asset prices and believe the inflation projections could prove stronger."