Concern the Bank of England has lost its grip on inflation has risen to such a level that markets are increasingly pricing in an interest rate rise by the summer to prevent a full-blown credibility crisis.
British inflation has surged to a six-month high of 3.3 per cent - well above that of any other G7 country - and looks set to hit 4 per cent early this year, double the target.
The consumer price inflation measure has exceeded the 2.0 per cent target for most of the last three years and the broader retail price inflation measure is even higher at 4.7 per cent.
Industry groups fear that louder mutterings about the central bank's credibility could drive it to tighten policy before a fragile economic recovery warrants it, particularly with harsh government spending cuts about to bite.
"If you tell a central bank it has lost credibility, you almost invite it to overreact," said David Kern, chief economist at the British Chambers of Commerce.
Pressure is mounting, however, in financial markets where investors are losing faith in the BoE's assessment that prices are being driven up simply by temporary factors.
Since the start of this year, benchmark gilt yields have risen even as yields on German and French government bonds have fallen.
Even more worryingly for the BoE, gilt breakeven rates - the yield gap between conventional and inflation-protected government bonds - have soared, reflecting growing fears that the central bank will struggle to bring inflation back down.
Five-year gilt breakeven rates have jumped 50 basis points in little over a month, double the rise in French breakeven rates and far more than the 35 basis point rise seen in the US Treasuries market.
"We're coming to a point where the Bank of England will have to take action to restore its credibility," said Henderson chief economist Simon Ward.
"If it doesn't, it is risking a pick-up in wage settlements, downward pressure on sterling and a loss of credibility that could have a serious cost to the economy."
Once lost, credibility for a central bank is hard to recover and some on the BoE's monetary policy committee must surely feel uncomfortable about recent market moves.
Andrew Sentance has so far been a lone committee member calling for higher interest rates but it is possible that one or more of his eight colleagues will join him at the BoE's monthly meeting which ends on Thursday.
Investors are warming to that view that a rate rise by the middle of the year is now a distinct possibility.
The lively policy debate which economists expect to happen behind closed doors at the BoE is likely to find only muted expression in the MPC's policy minutes, which will be published on January 26th and include a voting breakdown.
Last month the minutes suggested that those MPC members who voted to keep rates on hold were getting more worried about rising inflation pressures.
Rising inflation expectations are likely to be mentioned more forcefully, and there may be some reference to a discussion of the merits of pre-emptive rate rises to bolster public confidence in the BoE's fight against inflation.
Reuters