Recent posts have warned that a surprising surge in inflation could put paid to hopes of early further interest rate cuts. A “triple whammy” of bad news this morning suggests this risk may be crystallising:

1. Factory-gate prices jumped 1.4% in April to stand 7.5% higher than a year ago – the largest annual increase since 1985. The “core” annual rise – excluding food, beverages, tobacco and petroleum products – was 4.6%, a 13-year high.

2. Import prices surged a further 1.9% in March, pushing their annual increase up to 10.3% – approaching the peak of 13.7% reached in 1993 following sterling’s expulsion from the ERM. With the effective exchange rate down by 2% since March and world prices of imported commodities continuing to climb, a further rise is certain.

3. Energy supplier Centrica announced a fall in margins in its residential business to below long run target levels, despite price increases in January. It warned that it would “take the necessary action to deliver reasonable margins in the retail business”, supporting forecasts that residential tariffs will rise by at least a further 10% later in 2008.

New projections in Wednesday’s Inflation Report may show annual CPI inflation peaking at close to 4% later this year and remaining at or above the 3.1% letter-writing threshold for six months or more (see here).

While surging world commodity prices have been the key factor driving inflation higher, the impact has been magnified by a 13% fall in the effective exchange rate from a peak last July – equivalent in magnitude to the 1967 devaluation, when Harold Wilson famously claimed “the pound in your pocket” would be unaffected. Many economists have cheered on this decline, arguing it was necessary to “rebalance” the economy away from consumer spending. In a speech in January, Mervyn King talked approvingly of a drop of almost 10% in the effective rate by then, adding helpfully that “ financial markets are pricing in a significant probability of a further decline”.

With the broad money supply M4 having risen 22% more than nominal GDP over the last three years, and the exchange rate sharply weaker, the surprise is that economists should be surprised by current inflationary problems.