David Prosser: Inflation may be stubborn, but rate rises are off the table

Outlook Let's not get too concerned about the "stickiness" of inflation. No doubt the Bank of England's Monetary Policy Committee will be disappointed that inflation still has not come back within the one percentage point room for error it has either side of the official 2 per cent target, but continued falls in core inflation and the Retail Prices Index suggest we are heading in the right direction. The sharply lower factory gate price rises, moreover, that we saw last week, but which will not feed into the headline data before next year, give an indication of which way inflation is heading over the medium term.

What's really noticeable is how quickly the debate about monetary policy has changed. In the run-up to the summer holidays, the pressure for earlier-than-expected interest rate rises was beginning to feel difficult to resist. That lobby, championed by Andrew Sentance on the MPC, but also benefiting from the support of organisations such as the OECD – which in May called for a rate rise before the end of the year and an increase to 3.5 per cent by the end of 2011 – was very much in the ascendancy.

The mood as we go back to school feels very different. The debate today is whether or not the economic recovery is faltering so badly that the MPC should now be considering another bout of quantitative easing – monetary loosening rather than tightening.

Certainly, that was the issue on which MPs on the Treasury Select Committee were most keen to press the new MPC member Martin Weale yesterday. And Mr Weale made it pretty clear where his instincts were leading him. Though higher inflation has been persistent, he said he did not think people's inflation expectations had become decoupled from the Bank's target – one of the main planks in the case for a rate increase – and made it clear he sees monetary policy as the first line of defence should the economy slow further.

That said, it is clear that the MPC's new boy, in common with most of the rest of the committee, does not think the recovery has yet slowed sufficiently to justify a return to QE. Nor does he necessarily think QE would be the right type of monetary policy intervention this time around, especially since small businesses appear not to have seen the stimulus translate into credit easing so far.

Still, while the bottoms of MPC members, along with many leading commentators, remain wedged on the fence, there has been a perceptible shift in the argument. As inflation eases, albeit more slowly than many would like, the question now is not when we should raise interest rates but whether the economy needs additional support. And with next month's public spending review to come, it is difficult to see that changing for some months to come.