BRITAIN’S SURGING inflation caught City of London scribblers on the hop yesterday, rendering their forecasts redundant and prompting one to invoke the wit and wisdom of Manchester United manager Sir Alex Ferguson.

“This really now is ‘squeaky bum’ time for the Bank of England,” said economist Howard Archer of IHS Global Insight as he digested a spike in December inflation to an eight-month high of 3.7 per cent, well-ahead of the consensus forecast of 3.3 per cent and almost double the central bank’s own 2 per cent target. And that’s before we’ve seen any impact from this month’s VAT hike to 20 per cent, a tax rise that looks likely to push consumer price inflation through the 4 per cent level in the next few months.

Thus Threadneedle Street’s policymakers, whose job it is to keep inflation under control, face a tricky dilemma – do they raise interest rates at the risk of derailing the recovery, or do they stick to their guns in insisting that the pressures are short-term and that the cost of living will move back down again next year?

The Bank of England’s nine-man monetary policy committee (MPC), which sets Britain’s interest rates, would have had access to the inflation figures last week, when they decided to leave rates unchanged for the 22nd consecutive month. They were already under pressure to raise rates from their record low of 0.5 per cent and that will intensify after yesterday’s data.

One of the problems for the MPC is that the temporary factors pushing up inflation now have a far more permanent look about them. Commodity prices continue their seemingly relentless rise, pushing up food prices, and there are weekly warnings from clothing retailers about the spiralling cost of cotton. Rail fares rose this month and petrol has hit a record 122p a litre on the back of near-$100 a barrel oil. By Easter, the cost of filling a tank could hit £70, motoring organisations warn. On the home front, five of Britain’s big six domestic energy providers have raised prices in recent weeks, pushing average annual household energy bills up by £65 to £1,250.

The Bank of England’s consistent failure to keep inflation under control is straining the Old Lady’s credibility and there’s a risk the growing chorus of criticism could push the MPC into early action simply to be seen to be doing something. Most economists had expected rates to rise by the end of this year anyway and it is by no means clear that bringing it forward will have much impact on inflation. But there’s a very real risk that it could kill off the economic recovery before it’s really started.

That’s where Sir Alex’s colourful phrase comes in – now is the time for the bank to hold its nerve. Assuming, of course, that it’s got its long-term inflation forecasts right. If not, then, as another football manager once said, we’ll all be sick as parrots.

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Just a week after Britain’s best-paid banker, Barclays chief executive Bob Diamond, told MPs the period of “remorse and apology” for banks needs to be over, his bank has been hit with a record fine for giving out poor investment advice to more than 12,000 customers.

Many of those given bad advice were retired, or nearing retirement and, as well as the £7.7 million fine, Barclays is paying out £60 million in compensation to those who suffered losses as a result of advice. The fine was levied by the City watchdog, the Financial Services Authority, which said that although the bank detected the failings at an early stage, it had failed to take any action. The bank had failed to make sure the funds were suitable for investors, particularly those nearing retirement, and had not trained staff to explain the risks.

Barclays admitted yesterday it had “let customers down” and has already paid out £17 million in compensation, with a further £42 million due. The FSA said it viewed the breaches as particularly serious, given Barclays’ position as one of the UK’s major retail banks.

The £7.7 million fine is, coincidentally, more or less what the bank’s chief executive is expected to receive in bonus payments this year. If the Barclays boss really wants the remorse and apology to be over, he could consider settling the bank’s fine with a personal cheque.

Fiona Walsh writes for the Guardiannewspaper