THE environment in which central banks operate has changed and it has become difficult to apply the old rules of thumb to monetary policy. The US and Britain have been experiencing growth well above what their respective monetary authorities would regard as consistent with stable inflation, but that is exactly what they have.

This phenomenon flies in the face of traditional theory and has given credence to those who claim that the economic world has changed. The situation in Ireland is even more perplexing. Although the economy is in the midst of an unprecedented boom, officially recorded price rises are unbelievably low.

The evidence everywhere suggests that the nature of the forces which shape inflation has changed and that the era of low inflation is here to stay. Trade union power in the industrialised world has waned in the face of an emerging pool of low wage workers, and rapid advances in labour saving technology.

That great buzz word, globalisation, is creating a very competitive environment and at the retail level, competition has never been greater. Despite this, central banks are still engaging in the sort of rhetoric which was more appropriate to another era, but by and large, the rhetoric is not being matched by concrete action.

Having edged rates up by 0.25 per cent in March, the US Federal Reserve was forced to leave rates unchanged this week, despite the repeated inflation warnings. The reality is that the Fed Chairman, Mr Alan Greenspan, has come in for serious political criticism since he tightened rates, because despite his warnings, subsequent inflation releases have been tame.

It is one thing to argue about taking out insurance, but it is quite another matter to show what the insurance is being taken out against. The chairman will need a lot more evidence if he wants to justify any further increases in the coming months.

The situation in Britain is quite similar.

This week, the newly independent bank governor warned about the risks to inflation down the road. There is nothing new there as he has been issuing similar warnings for quite some time, but the road seems to get longer and longer.

Rates have been increased by just 0.5 per cent since last autumn, hardly enough to choke off the inflation threats which he haunted Kenneth Clarke with. Yet, Mr Clarke's inflation target of 2.5 per cent has just been attained. One wonders at the wisdom of granting interest rate independence to an individual who has got it so wrong over the last couple of years. However, the Governor's problem now is that as much as be would like to tighten rates further, the strength of sterling seriously limits his scope.

In Ireland, prices at the retail level are not showing any undue upside tendencies, despite the sharp depreciation of the pound against sterling. It must be the case that margins are being seriously squeezed, but there is a limit to how far this can go. Furthermore, interest rates will have to fall over the next 18 months, and it now appears that we will be paying little or no tax once the next administration is in place.

This looks like a recipe for one hell of a binge over the next couple of years, and the guardians of price stability must be worried at the prospect. On top of this, they face the ongoing pressures on the pound within the ERM grid as the markets seek to exploit what they believe to be official exchange rate policy.

In the aftermath of Labour's victory in Britain, it looked as if sterling would oblige the pound by falling against the deutschmark because the dream scenario would be a gradual slide down the ERM grid, while at the same time maintaining the position against sterling. This should happen eventually, as every interested party in Britain wants sterling weaker, but it often takes the markets a while to latch on to such an obvious course of action.

In the meanwhile, Irish financial markets will remain nervous and policymakers might just consider what happened in Japan in the late 1980s, when prices at the retail level behaved very well, but asset prices exploded. That country is still paying the price.