During the fictional “Great Moderation”, which was actually the “Great Delusional Bubble”, the apparent stability of financial markets and the underlying economy made it easy to dismiss the nay-sayers against the consensus. However the world we find ourselves in a few years later continues to confound, surprise and disappoint in equal measure and after analysing a broad range of economic and market views it is a little troubling at the moment to see all the big hitters who went against the consensus and called the downturn right are, almost to a man, starting to get very concerned (from simply troubled) again. As somebody who has followed them in the days they were ridiculed Prometheus takes these people’s views very seriously but we will leave an examination of specific thoughts for another day. There is more than enough going on right now to occupy our minds.

Yesterday's inflation figures were certainly an unwelcome surprise, although the VAT changes and weak sterling were bound to have some impact. Nonetheless the size of the increase was unsettling. The common theory over the recent spike is that it has been led by “cost push”, rather than “demand pull” inflation. In short this is not an overheating economy, just one facing external pressures. Certainly as the currency stabilises, or strengthens, and if commodity prices possibly weaken in the face of slowing global demand (or less speculative demand) inflationary pressure should subside. However if it doesn't this does ask some awkward questions of BoE interest rate policies and we may see a rate hike sooner rather than later. Of particular concern was seeing car insurance rising by around a quarter, which in a competitive market should not be happening. It raises the question of semi-cartel pricing in certain industries whose products may be considered necessities as industries try to claw back profits lost in other operations.

Persistent inflation does have one benefit, however, in that it erodes the relative value of your debt. This may ultimately become a creeping fear of financial markets if UK inflation remains high; however from our point of view we are the best positioned to allow this to happen. This is because (as we have mentioned a few times before, it is important) we have the longest debt maturity timetable of all developed nations at about 13.5 years (as opposed to 4-7 years elsewhere; indeed the US has to roll over about 40% of its massive debt over the next couple of years). The reason that this is so useful is that if markets begin to believe inflation is growing in a nation then they will demand a higher yield on that nation’s debt, driving up borrowing costs ever higher, replacing a possible deflationary spiral with an inflationary one. As such the common notion that a country can simply inflate away its debt burden doesn't work as advertised as it has to refinance its debt at higher rates. However we have a window where we could get away with it for a while before it becomes crippling. This is not a policy we would advocate but it gives us some wriggle room.

The sad truth is the Western world is facing a real tightrope between deflation and inflation with massive risks on either side, and meddling ideas like the sudden German ban on short selling will not help deal with the fundamental problems. Incidentally a very sound point Mervyn King made at his conference last week was that the markets which Eurozone governments are now up in arms about are the very ones which have been funding their fiscal incontinence for years. So it is a little bit rich to complain when they suddenly start doing the maths and realise things don't add up. Indeed to Prometheus the surprise is that the markets were so generous, sorry I meant astonishingly complacent, for so long.

One bit of good(ish) news is that the Greek bail-out package has achieved its first success, supporting the roll-over of € billions of debt that had threatened to bankrupt the country. Apparently the market stayed away, meaning the EU now owns lots of debt that it will have to take a haircut on at some point (meaning billions thrown away) but at least the immediate crisis is averted, as planned.

Looking at our own problems the new coalition government continues to throw up surprises that please the optimist, the most notable being the new Chief Secretary to the Treasury, the Liberal Democrat David Laws. Looking into his past this man received a Double First in Economics from Cambridge and rapidly rose up through JP Morgan’s ranks before becoming Head of US and UK Treasuries at BZW (the forerunner to Barclays Capital) before retiring before his 30th birthday. It is this last job that is a key point because it means Mr Laws was on the very coalface of the dreaded sovereign bond markets and I doubt he took Liam Byrne's jokey letter “I'm afraid there's no money - good luck” very well. This man now understands where we are. This is good. This is very good. Not often can we say that these days.

And finally, just to prove Angela Merkel only wants markets that will accept Europe’s debt addiction unthinkingly (which they have, quietly and stupidly for years) the following quote says it all:

"The lack of rules and limits can make behaviour in financial markets driven purely by the profit motive destructive and lead to an existential threat to financial stability in Europe and even the world. The market alone won't correct these mistakes."

She doesn’t get that the mistake was to act like sheep to the rhetoric of ignorant politicians for years, not to react in panic when their plans start to crumble.