Last week's rise in UK interest rates has been described as the first of not very many. Unlike previous rate cycles, this one is forecast to be mild with rates likely to go up by around 1 ½ per cent over the next couple of years.

The logic is easy to follow. Inflation has been conquered and the mistakes of the past are unlikely to be repeated.

Those mistakes were a combination of wildly expansionary fiscal and monetary policies; governments borrowed too much and the central bank let them off the hook by keeping interest rates too low. This could never happen again, least of all here where we now have an independent central bank and a chancellor wedded to "prudent" spending and tax policies.

In fact, it was only a few months ago that we were all fretting about "global deflation". Egged on by a prominent US central banker, the possibility that all of our economies could go the way of Japan, stuck with no growth and falling prices for a decade or more, was uppermost in many minds.

The Japanese example was a scary one and it was easy to make the case that we were going down the same road. Except that the argument was baloney. The Japanese lost a decade of growth because they pursued policies guaranteed to produce such an outcome.

Inflation and deflation are both sides of the same coin. The processes that drive inflation can be complex but are not that difficult to understand. It's all about money.

The best description of the quantity theory of money is not to be found in anything written by Milton Friedman, or any other economist, but in The Hitchhiker's Guide to the Galaxy by Douglas Adams. The economic experiment posited in that book is to make the leaf the unit of currency. Within about an hour of that decision being taken, it costs two deciduous forests to buy a cup of coffee. That's inflation.

Of course, the real world is a bit more complex that that. In Japan, for example, they found it very hard to increase the supply of money (they didn't try very hard). But that doesn't take anything away from the basic principle. Usually, expansionary monetary and fiscal policies will show up in higher inflation. If you combine this with an external inflationary boost - like a commodity price rise - you have the 1970s. Here in Britain, such circumstances produced inflation of 26 per cent in 1975. Thank goodness it couldn't happen again.

I would not be quite so sure about the argument that inflation cannot become any kind of problem. One of the things we learned during the Asian and Russian debt crises of the late 1990s is that globalisation has taken many forms, sometimes surprising ones. I think another lesson that we are about to learn is that inflation has also been globalise.

If we look at the level of interest rates around the world it is clear that the monetary accelerator is being pushed to the floor. Budget deficits are blowing out everywhere. The engines of (Western) economic growth are beginning the expansionary phase of the cycle at an absolutely unique point: the US and UK economies are at full employment. An old-fashioned economist would worry about the potential for wage inflation. Post-modern economics is still musing about global deflation so thoughts of labour market stress are viewed with hilarity.

Perhaps these concerns can be taken care of by independent central banks. But there is another worry, the globalisation of inflation. We are confident that our domestic institutional framework - stability pacts, independent central banks etc - can protect us from ourselves.

But there is a growing threat from imported inflation. Commodity prices are on the rise, mostly because of a booming global economy. It's a cliché, but nonetheless real, to point to China as an astonishing source of increasing demand for all sorts of goods and services.

We used to chuckle about China fiddling its economic statistics to exaggerate economic growth. It now seems that while the statistics are indeed dodgy, they have been fiddling the numbers down. China might be growing at a current rate of 15 per cent. China used to be a big part of the global deflation story. It could just as easily come to be seen as a source of inflation.

Our domestic policy is undoubtedly better. But that does not mean it is infallible. If the global deflation scare - which is keeping US rates at 1 per cent and EU rates at 2 per cent - proves to have been pure hokum we may look back on a monetary mistake.

And if the world economy is producing persistent upward pressure on commodity prices then the idea that we never need to worry about interest rates again may need to be revisited.