Is inflation set to return to the UK? Consumer price inflation (CPI) in the UK reached 3.5% in January – its highest level for 14 months – but not everyone seems concerned.

Compared to the size of the UK government deficit and the debate over how and when it should be tackled, comparatively little attention has been paid to inflation.

There is a view that technical factors, such as the rise in value added tax (VAT) from 15% to 17.5%, a year after it was cut in a bid to boost demand, are largely responsible for the current inflation increase.

But this is not the whole story, as there are many who expect to see inflation return.

A recent JP Morgan inflation expectations survey found 52% expected to see inflation exceed central bank targets in the US and the UK. One reason is the increase in government debt, as central banks have used quantitative easing to avoid a re-run of ‘the great depression’ of the 1930s.

The monetarist view is that this will lead to inflation, but against this, it can be argued that big increases in government debt in Japan have not led to inflation. Spare capacity in the UK economy could also limit inflation, as corporate pricing power is low and wage demands are muted.

However, we could see inflation in Asia, with rising food prices and asset price bubbles. This could then spread globally and central banks in some countries, such as the US, may permit single-digit inflation in order to reduce government debt.

But the European Central Bank (ECB) is more likely to take a tougher line on inflation for historical and political reasons. Germany, in particular, has, after the hyper inflation of the Weimar Republic, always taken a strong anti-inflationary stance.

Inflation is back on the scene but not yet centre stage. This may change, of course, and if inflation does continue to rise in the UK, we may find out whether governments have really learnt how to deal with it, or if it’s seen as a lesser evil in a time of financial instability.