Explanation time for the Bank

Mervyn King's 10th letter to Number 11 Downing Street is similar to many of the other ones he's written. In his view, the 4% rise in the CPI in the past 12 months is unfortunate - but temporary, and almost entirely driven by factors beyond the Bank's control.

He insists that the MPC has not "lost control of inflation". Every nation can set its own inflation rate, and by squeezing the domestic economy, the Bank could certainly speed up the space at which inflation goes back to 2%. But any sharp rises in the base rate to achieve this would run the risk of stalling a recovery which may already have stalled. If that happened, the Bank could find itself lowering rates again, before the end of the year.

So readeth the gospel according to Mervyn King, so elegantly described in his recent speech. But there are some objections to this approach, which are causing some nervousness within the Bank.

First, there are those who wonder whether all of the most recent price rises can necessarily be blamed on outside factors, or the chancellor. The MPC has lately taken much comfort from the fact that the CPIY - the measure which excludes indirect taxes - was growing at an annual rate of less than 2%. But in January, that index was 2.4% higher than a year earlier, up from 2% in December. The CPI-CT, which holds indirect taxes constant, rose by 2.3%, up from 1.9% the previous month.

This does not prove the governor wrong: until this month, I would say that the majority of City experts have agreed with him that most of the upward pressure comes from the fall in the pound, VAT changes, and global changes in the price of food, energy and other commodities. But there are some warning flags in the January numbers. And you have to wonder how long it can take for a depreciation that largely happened in 2007 to have its full effect.

More important, if the governor believes - as he says he does - that ultimately the UK can set its own inflation rate, it's not clear that it's relevant where the price pressure comes from. What matters is whether it's temporary.

This brings us to a second objection, which I discussed at length on Friday: the notion that the Bank is responding differently to today's malevolent external price pressures than it did to more benign ones, when world prices were falling in the first part of the 21st Century.

As I said on Friday, the Bank has a response to this: not least in the fact that the average rate of CPI inflation since May 1997 has been fractionally below 2% and the average rate of the old, broader measure, RPI-X, has been only slightly above the 2.5% target. They have not so far allowed changes in the global terms of trade to permanently affect the domestic price level.

Bank officials don't publicly discuss this argument because it makes them uncomfortable. If inflation went below the target in the noughties, that was by accident, not by design. The same applies to today's overshoots. When it comes to missing the target, the MPC prefer to be hung as fools. Openly accepting the knavish view - that it is better for the economy, long term, for inflation to overshoot - is a slippery slope.

Tomorrow, we will see how and whether the Bank has changed its forecasts as a result of the last few months' disappointing inflation and GDP numbers. We will see how far it has revised down its growth forecasts as a result of that first estimate for the fourth quarter. Crucially, we will also see whether it is still expecting inflation to be at or below target at the end of the forecast period, on unchanged interest rates. I would be very surprised if we did.