The Bank of England yesterday raised rates to 5%, as expected. With headline inflation at 3.6%, the highest since the middle of 1998, and house prices apparently reaccelerating, this shouldn’t have been a surprise to anybody. What’s more uncertain is knowing when, and at what level rates will peak.

At the moment I’m not actually too worried about inflation; the reason we’re at the currently elevated level is due to a number of “exogenous” shocks, most obviously in energy prices, but also to other non-discretionary items such as a doubling in university tuition fees. It would be worrying though if the UK consumer started to think that this temporary spike up in inflation was more permanent, and started to demand higher wages as a result. Average earnings growth is running at a 4.2% rate, within the Bank of England’s tolerance – but the wage setting round is about to begin, and if unions and employees base their demands on the sentiment that inflation is high and persistent, and achieve higher salaries as a result, there’s a risk that we get a self-fulfilling prophesy of embedded higher inflation. The Bank has been keen to emphasise that it is expectations of inflation that are the key driver of actual inflation – these exogenous shocks are much less important. And how can they keep inflation expectations down? By hiking rates until we get the message. That’s why yesterday’s rate hike almost certainly isn’t the last in the cycle – another 0.25% in February is likely. On the average mortgage of £90,177 that takes the monthly payment up to £540.38, £26 higher than it was last month. With unemployment rising simultaneously, the wind is gradually being taken out of the sails of the UK consumer.