THE script for 2011 had appeared as simple as it was momentous: would the fiscal squeeze stifle the recovery? That question remains as potent as before but just days into the new year the narrative has now abruptly switched to a rival storyline: just how bad will inflation get?

Today's official figures for the consumer-prices index (CPI) in December made sickening reading even for those with strong stomachs. The consensus among forecasters before the release was that inflation would edge up to 3.4% from its rate of 3.3% in the year to November. Instead it jumped to 3.7%.

The Office for National Statistics (ONS) fingered two main culprits for that upward lurch of 0.4 percentage points: transport and home energy costs. The price of petrol measured by the CPI reached a record high of £1.22 a litre in December and higher air fares also contributed to the increase (though this was because their weight in last year's index was higher than in 2009). There was no safety for stay-at-homes as average gas bills went up.

What makes the inflation jump in December so worrying is that it came before this month's rise in the main rate of value-added tax, from 17.5% to 20%. You might think that this would not add to inflation, since VAT also rose by a similar amount last January, when it reverted to its then normal rate of 17.5% after being lowered for 13 months to 15% as part of the Labour government's fiscal stimulus to combat the recession. But official estimates suggest that only about half of that fall and subsequent rise was passed through to prices whereas virtually all of this year's tax increase is expected to be.

While some firms might have raised their prices in advance, affecting the December figures, the main impact of the VAT rise is still to come. As a result, inflation looks set to surge still further in early 2011, to over 4% - more than double the 2% inflation target. That will further corrode the credibility of the Bank of England, which has the task of hitting that target but has manifestly been failing to do so. Already, some are urging the bank to push up the base rate, which has been at an all-time low of 0.5% for almost two years, in order to redeem its reputation as a doughty inflation-fighter.

Such a move would be misguided. Raising interest rates now would not affect the current surge in inflation. What matters is the future outlook, which will be affected by the stance of not just monetary but also fiscal policy, which is tightening sharply because of both tax rises such as the VAT increase, squeezing household budgets, and big spending cuts.

The surge in inflation may have been bigger than expected but it should still nonetheless prove temporary, as the Bank has argued, as the margin of spare capacity opened up in the recession bears down on price pressures. That effect might be trumped if there were a return to a pay-price spiral. But although inflation expectations have risen, average earnings are rising at well below their usual rate, by only around 2% a year. With unemployment at close to 8% of the labour force and the public sector shedding jobs (and experiencing a pay freeze) it is hard to envisage inflation building on itself through higher wage demands.

The Bank of England may have got its inflation forecasts wrong but its policy of keeping monetary settings ultra-loose remains the right one, until it becomes clear – probably by late summer - that the recovery is weathering the fiscal consolidation. Then and only then should it start gradually raising interest rates. That storyline of the script for this year should at least remain intact.

Our Buttonwood columnists muses on the figures - and the impact on hard-pressed savers - here.