INTEREST RATES have only risen by 1.5 percentage points since the election last year, in six bite-sized, quarter-point stages including yesterday's surprise move, but we are beginning to feel the pinch now. So what is going on? Are we in good times or bad, boom or bust? The truth is we are somewhere in between. Unfortunately this is not the Goldilocks economy of American dreams, neither too hot nor too cold. The British economy is more like Mother Bear and Father Bear's porridge mixed together, overheating in parts and stone cold elsewhere. Manufacturing industry is technically in recession, squeezed by interest rates and a high pound, while consumer spending is buoyant and house prices have not yet felt the chill of dearer mortgages.

It is, of course, exporters who make the most noise, while estate agents slap another pounds 10,000 on the asking price in silence, which makes it sound as if things are worse than they are. Nor should we be too distracted by the illusion that the Asian meltdown is on the verge of pulling the world into slump. We have heard so much about globalisation that it is tempting to see the Russian economy as the next domino, but the crisis in Russia is almost exclusively internal. It is tempting, too, to fear that if Japanese and Korean investment in Britain goes temporarily AWOL, there will be no jobs for unemployed former miners in Wales. But we should remember that Norwegian and Australian companies invest much more here - only they tend not to go for the high-profile, high-subsidy greenfield sites.

But we should not be complacent. There is evidence that those parts of the British economy which are booming could be storing up inflationary trouble for the future. Inflationary expectations may be low as a result of our long run of low inflation since the pound was devalued out of the exchange rate mechanism in 1992. But the present state of the housing market especially suggests that Britain's even longer-run inflationary psychology has not yet been broken, and the Bank of England is right to tighten the screws. It would be all too easy to dismiss the recent rise in inflation as a blip caused by tax rises, but the last time we had a blip it got the Conservative Party where it is today, as well as doing serious damage to the economy. Indeed, this newspaper has consistently argued that rates should have been raised earlier. The Monetary Policy Committee held off from doing that in recent months only because of the strength of the pound. Its recent drop has obviously tipped the balance in the evenly divided committee.

Contrary to the impression given by the jargon of "the cumulative tightening of the labour market" in the committee's report, setting interest rates is an inexact science. The point to remember is that we will not know the impact of yesterday's decision for at least a year, by which time it will be too late to do anything about it if it is wrong. Given that the long-run dangers of inflation are greater than the short-run costs of the squeeze, the Bank is right to err on the side of caution.