Today's inflation figures are shocking but should not have come as a complete surprise given recent warning signals. The details show few redeeming features. Eight of the 11 main categories contributed to the increase in the annual headline rate. The only significant negative contributions were from clothing/footwear and transport – the latter mainly reflecting an erratic fall in air fares.

My previous forecast was that inflation would reach the 3.1% letter-writing level in July, peaking at 3.5% in September and remaining above 3% until February 2009. This was at the top end of economists' expectations but now looks too low. A 4% peak now looks plausible if retail energy prices are hiked by a further 20% later this year, as widely expected.

The view that the Bank of England’s Monetary Policy Committee should continue to cut interest rates because a weakening economy will ensure inflation is back below target in two years’ time is questionable, to say the least. For one thing, the MPC’s remit is to hit the target “at all times” – its actions have less effect at short horizons but still have some impact, so it is wrong to focus solely on the two-year-ahead forecast. More importantly, a nonchalant MPC response to a significant and prolonged overshoot risks undermining its inflation-fighting credibility. Inflation expectations are already showing signs of detaching from the target; if firms and workers build a higher trend level of inflation into price- and wage-setting behaviour, the forecast return to 2% or lower two years ahead is unlikely to occur.

In the last Reuters interest rate poll, conducted before the May MPC meeting, New Star was one of only three houses expecting Bank rate to be held at 5.0% for the remainder of 2008. A near-term cut now looks extremely unlikely barring recessionary signals from activity data.