So what will determine the MPC’s policy? According to the MPC’s remit, the answer is surely “the inflation rate”. While inflation remains so low – and it may not hit the 2pc target until 2018 – there is an argument that rates should remain at their current record low.

Yet the Bank of England’s decisions should be forward-looking. The determinant of interest rate policy should not be where inflation is now but rather where it is likely to be at the point in the future when interest rate decisions now can have a bearing on the outcome. This is usually thought to be about two years’ time. In two years from now, with the deflationary effects from lower oil and other commodity prices having fallen out of the annual comparison, the inflation rate should be approaching the 2pc target.

But things aren’t quite this simple. The stronger the growth of aggregate demand in the immediate future, the more likely it is that inflation will exceed the target in two years’ time. Moreover, the MPC has a secondary objective, namely, subject to maintaining price stability, “to support the economic policy of Her Majesty’s Government, including its objectives for growth and employment”.

As usual, there are contradictory influences on aggregate demand. After the recent lull, fiscal tightening is set to resume. This will tend to restrain the growth of demand. Equally, the continued low growth of our major markets overseas will dampen the growth of our exports.

Nevertheless, there are also some positive factors. Perhaps the most important development is the growth of average real earnings after six years of decline. One consequence of inflation remaining low for a fair bit longer is that, even without any acceleration in the pace of nominal earnings increases, this increase in real earnings will continue. This should enable consumers to absorb the effects of fiscal tightening and underpin a pretty good increase in consumer spending. By the time that inflation rises significantly, the pace of nominal earnings increases should be picking up, thereby allowing real earnings to continue to grow.

David Fuller's view

Here is a PDF of Roger Bootle's article.

My guess is that the UK will not rush to raise rates because most of its trade is with the Euro region.  Therefore George Osborne would certainly not want to see the UK’s competitiveness eroded by sterling appreciation against the single currency.

Meanwhile, the best lead indicator of somewhat higher inflation is likely to be the Continuous Commodity Index (Old CRB), which has equal weightings.

What would cause the CCI to rise?  It may not be what you think.

Increasing demand would not be the key factor, although it would help somewhat.  For instance, demand for most commodities has been rising gradually, due to lower prices and modest global GDP growth. 

The key variable for commodities is supply, which can occasionally change quite suddenly.  In recent years we have seen record supplies of industrial commodities, mainly due to technological innovation which made it easier to increase output. 

We are just beginning to see supply cutbacks, notably from mining companies.  These will continue until metal prices are significantly higher.  Oil production, which is mainly controlled by governments, has yet to follow this lead and above ground reserves currently total more that 3bn barrels.  Moreover, the Saudis could not accept the humiliation of rolling back production increases at the OPEC meeting earlier this month. Consequently, this lose-lose situation will continue for a while longer.

(See also Tuesday’s comments on OPEC)