Jeremy Warner: Bank may just have got its sums correct

Outlook To the relief of the Bank of England, which has no real need to justify itself over its policy of zero interest rates and quantitative easing, but was beginning to get a little worried about the apparent stubbornness of the inflation rate, price inflation is at last beginning to ease as projected.

But despite the retail price index's decisive further move into negative territory yesterday, deflation this is not. The consumer prices index remains at an above-target 2.3 per cent and, stripping out the effect of interest rate reductions, even the RPI is still at 1.7 per cent. Unlike the targeted CPI, the RPI also takes some account of house prices. It would be higher still if these too were removed.

The inflation rate is expected to continue to fall for much of this year and then remain subdued well into next, but even the Bank of England thinks the chances of the CPI slipping into negative territory for any length of time are quite limited.

Britain has a deeply embedded inflationary mentality. Even when overall prices are falling year on year, as on the RPI measure they now are, people are reluctant to believe the evidence; still less are workers inclined to use this time-honoured measure of prices as a way to determine wage increases. All of a sudden, everyone wants to use the CPI, even though people are losing their jobs right, left and centre and the economy is deep in the doldrums.

In any case, with the oil price now back to$60 a barrel, retail energy and fuel prices could soon be on the way back up and it is not impossible that, come next year, the official measures of inflation could be rising again.

The Bank of England admits that it does not yet know whether the policy of expanding the money supply through quantitative easing is working in the way it hoped, but the evidence that it perhaps is mounts by the day. There has been a marked rediscovery of appetite for risk over the past two months. Even sterling is rebounding a bit: a sign of renewed foreign confidence in the UK economy.

No one wants to call this "green shoots", but by general agreement we no longer seem to be staring into the abyss of sustained price deflation and economic Armageddon. The Bank still sees risks to the downside, but the point at which a gentle application of the brakes becomes necessary may be sooner than we think.