FINANCIAL commentators spent much of yesterday trying to play down fears inflation may be rearing its ugly head again.

Just one month ago, all the talk was about how the Governor of the Bank of England would have to write to the Chancellor of the Exchequer to explain why the consumer price index was undershooting its target by 1%. Now the fear is that it may overshoot the target by 1% and that the Governor will have to write a letter explaining why. Quite a turnaround really.

The consensus is that the causes of the leap in prices evidenced by the inflation figures published yesterday are temporary. They will dissipate within a few months. The effects of the ending of the reduced VAT rate being a case in point.

I’m not so sure about fuel prices, though. Higher petrol pump prices may turn out to be with us for some time.

The Bank of England sounds cool about these factors. It clearly thinks inflation will subside principally because there is plenty of spare capacity in the UK economy at the moment. Nor will consumers start spending more until unemployment fears begin to recede.

These factors, says the Bank, will dampen inflationary pressures later in the year and therefore yesterday’s price spurt is not a reason to tighten monetary policy yet.

As a result, interest rates will remain low.

But how does that work in the shorter term? How can rates charged by lenders remain below inflation?

There is also the possibility the Bank is wrong. In the recent past, the Bank’s inflation predictions have proven too optimistic.

And isn’t unemployment already beginning to turn? Last month’s figures were much better than expected. We’ll see what the latest figures show when they are published later this morning, but, if recent trends are anything to go by, those figures should add strength to the idea that unemployment is close to peaking.

So could something else be going on? Might it be that when you look at the ongoing rises in house prices and inflation, combined with falls in unemployment, that things are more robust than we believe.

AFTER more than a decade of Labour, we have become used to ministers making big spending pledges, only for them not to deliver in subsequent months and years.

The Government’s much-trumpeted £2.3bn car industry investment scheme turns out to be no different. The Automotive Assistance Scheme has failed to pay out a single penny so far. Indeed, Jaguar Land Rover has given up on the scheme and raised investment money elsewhere.

The Government argues that the AAP is a long-term scheme and we should not expect deals to be clinched overnight. A plausible argument, you might think, but could it also be a pretext for letting things drag on so long they are forgotten about?

Hopefully the same will turn out to be true about the fuss surrounding bank bonuses.

The much-heralded tax will actually yield very little by way of revenue for the Treasury.

Mr Darling says he won’t water it down over the tax, but he will, in a few months’ time when the banks have dropped out of the news, do exactly that.

In the meantime, the move has damaged the UK’s reputation as a good place to do business.