A year, to paraphrase Harold Wilson, is an eternity in economics. This time last year inflation was on its back and Central Banks were fretting about the risk of deflation. Now Central Banks have the opposite problem, with supply shortages and energy prices propelling inflation to uncomfortably high levels. As with so many trends, good and bad, America leads. Last week financial markets were shaken by news that US inflation had risen to 6.2%, the highest level in 30 years.

America’s bout of inflation is partly a product of the Federal Government’s decision to shower consumers with cash handouts and generous unemployment benefits last year. Incomes boomed amidst the deepest recession since the 1930s, and consumers went on a spending spree. The US saw almost five years of growth of spending on durable goods packed into a year. No wonder factories and supply chains struggled to cope, nor that prices have risen.

European governments were less generous than the Trump and Biden administrations, with help focussed on preserving jobs, rather than giving handouts directly to consumers. But while America may be leading, inflation is rising around the world. In the euro area and the UK inflation has risen from roughly zero a year ago to over 3.0%.

With hindsight rising inflation shouldn’t have been such a surprise. After last year’s pandemic bust came a boom. Businesses that had been putting workers on furlough and planning for a slow recovery had to cope with surging demand. The normal ups and downs of the business cycle went out of the window. Demand ebbed and flowed with the vagaries of the pandemic, lockdowns and government support.

On the face of it, it looks like Britain is running out of workers. Dig deeper and a different story emerges.The speed and scale of the rise in inflation has prompted fears that this could be the start of a new period of higher inflation. Supply shortages may have triggered the surge in prices, but easy money policies, could, so the argument goes, turn this into something more long lasting. The personal finance pages are full of articles about how investors can protect themselves from inflation.

Central banks, financial markets and most economists are more sanguine. The general view is that inflation will peak before the middle of next year and drift lower thereafter. The conviction that the current bout of inflation won’t last explains why few expect central banks to raise interest rates aggressively.

In the UK financial markets are pricing in an increase in rates from the current level of 0.1% to over 1.0% at the end of 2022 and have largely priced in the first hike coming next month. Economists expect the Bank of England (BoE) to move more slowly, with interest rates rising to 0.5% by the end of 2022.

The euro area is in a different position. The spectre of deflation has haunted the region in recent years and interest rates rises look some way off. The European Central Bank’s President, Christine Lagarde, has suggested rates are unlikely to increase next year; economists concur.

America may be leading the world on inflation, but the Federal Reserve’s ‘dot plot’, which measures interest rate expectations among the rate-setting Federal Open Markets Committee, shows members do not expect to increase rates in 2022. (It may seem odd that the US, where inflation is already over 6.0%, is expected not to raise rates when the Bank of England, confronting inflation of 3.1%, is widely expected to do so. However, the Fed will shortly tighten policy by beginning to unwind its programme of quantitative easing. And the Fed, unlike the Bank of England, has a mandate to achieve full employment, something which, with US unemployment above pre-pandemic levels, points to caution in raising rates.)

The Bank of England is most likely to move first on rates. The Bank’s governor, Andrew Bailey, has insisted this month’s vote to keep interest rates on hold was a “close call” and the BoE “won’t bottle it” in raising rates if the economy develops in line with its forecast.

Central banks are weighing the threat of higher inflation against the risk of premature rate rises derailing the recovery. This bout of inflation has been worse than expected, but central banks don’t think it will last. We are inclined to agree. If we’re wrong, interest rates will need to rise faster than expected, and that will not be good for growth or for asset markets.