A previous post argued that a January speech by Bank of England Governor Mervyn King signalled a change in the Monetary Policy Committee's interpretation of its remit. Instead of targeting a 2% annual rise in consumer prices "at all times", policy-makers would focus on the Bank's forecast for an unspecified "core" inflation measure, excluding "temporary price level factors". The post suggested that this amounted to a de facto raising of the target from 2% to perhaps 3%.

Markets, it appears, agree that the Bank's inflation-fighting commitment has softened. The yield gap between conventional and index-linked gilts of between five and 15 years' maturity – a proxy for long-term market inflation expectations – has risen by 50 basis points (bp) since the February Inflation Report, which confirmed the dovish message of the Governor's speech. US market-implied inflation expectations are little changed over the same period  – see first chart.

The UK yield spread is now 50 bp above the average over the last 10 years and at its highest since September 2008. It is above the levels reached before sustained increases in official interest rates starting in 2003 and 2006 – see second chart. With growth accelerating, asset prices buoyant and sterling raw material costs soaring, the Bank should already have started to withdraw emergency stimulus. Markets may yet force an earlier and larger rise in rates than most expect.