Despite a sharp increase in inflation last month, two members of the Bank of England's Monetary Policy Committee voted to cut interest rates at their last meeting.

Inflation rose to 2.5 per cent, up from 2.2 per cent in January. As expected, the main driver behind the rise was the increase in the cost of energy; gas, electricity and fuel.  But part of the increase was also down to a technical change in the way the figures are calculated.  The Bank of England has forecast that inflation will rise very sharply in the next few months, possibly to 3.1 per cent or more, as higher energy and food costs feed in to the system.

But the Bank seems increasingly convinced that inflation will also fall back quickly later this year and in to 2009.  It latest summary of conditions pointed to slower growth in the value of retail spending, easing in demand for housing, lower investment intentions, tighter credit conditions and weaker demand for labour.  All factors that are likely to drive inflation downwards.

Crucially, research by the bank showed that the great majority of retailers and other suppliers to consumers do not expect to be able to pass on increased costs to their customers.
In the circumstances, it is little wonder that some members of the MPC think that another cut in rates would be justified.  John Gieve, deputy governor responsible for financial stability, and David Blanchflower voted for a reduction in rates at the last meeting, compared to seven including governor Mervyn King, who voted for an interest rate freeze of 5.25 per cent.  As the economy slows, we may soon be faced with the odd prospect of a cut in interest rates at the same time as inflation climbs.