A week may be a long time in politics, but the past month has been an eternity in economics for the Bank of England, heralding dramatic shifts in key aspects of Britain's prospects and in the Bank's likely response.

Four weeks ago, amid growing economic gloom, the Bank's Monetary Policy Committee (MPC) was widely tipped to become the hero of the hour, riding to the rescue with further cuts in interest rates. Even if rates were held in May - as the MPC decided later that they should be - the expectation was that a cut this month was a done deal.

All of that changed abruptly on May 13, with grim data showing that headline inflation had surged in April to 3 per cent - within a hair's breadth of the 3.1 per cent that would force Mervyn King, the Bank's Governor, to write an explanatory letter to the Chancellor.

Inflation had in any case been tipped to rise steeply over the summer, leaving the MPC in a quandary amid conflicting stresses of rising price pressure and faltering growth. Yet with headline inflation having risen faster and farther than forecast, and Mr King facing the prospect of not one explanatory letter but a series, he used the MPC's quarterly Inflation Report last month to set out a new, hardline stance.

With the Bank now forecasting that consumer price inflation will climb to almost 4 per cent over summer and not return to its 2 per cent target for two years, even if rates were kept pegged, cuts were wiped from the agenda. Now, markets are betting that base rates will rise by next year.

Despite a fretful nation yearning for cheaper borrowing, this week's MPC rate-setting meeting seems destined to produce another “no change” verdict, turning the MPC from heroes to zeroes with the public. Here is our monthly guide to the issues facing the MPC.

Growth and activity: cooling off

Worries over deteriorating prospects have mounted in the past month, with a slumping housing market the biggest cloud. Last week, Nationwide's survey showed that average house prices had plunged by 2.5 per cent in May, their seventh consecutive monthly fall. The steepest monthly price fall since 1991, in the last recession, left property values down 4.4 per cent on a year earlier.

A central cause of uncertainty for the MPC has remained the impact of tumbling house prices on consumer demand, with the Bank having played this down for months.

Figures in the past month have sown further confusion over this issue, with relatively upbeat official retail sales figures at odds with bleaker high street surveys. Official data showed that volumes of goods sold fell in April by 0.2 per cent, matching their March decline to give the first back-to-back monthly falls in more than two years. However, sales fell less sharply than implied by grim findings from the British Retail Consortium, which showed the like-for-like value of sales in April down 1.5percent from a year earlier.

First-quarter GDP figures added to the ambiguity, showing that households raised overall spending by a hefty 1.3 per cent in the first quarter, after a meagre 0.1 per cent gain in the previous three months. The strength of consumer demand limited the economy's first-quarter slowdown, with GDP rising 0.4 per cent, against the 0.6 per cent pace of the previous two quarters.

Yet many economists expect consumers to go into sharper retreat. The latest study of consumer confidence showed that it fell last month to its lowest since 1990. In another ominous sign, unemployment has begun to rise, increasing for the past three months.

Costs and prices: bubbling up

As signs of faltering activity have piled up, so, however, has evidence of growing inflationary pressures. As well as a jump in headline consumer price inflation in April, official figures showed cost pressures building up in the price pipeline from factories to shops. Producer output prices, for goods leaving factories, rose at a record annual rate of 7.5 per cent in April. Manufacturers' costs for raw materials and fuel also rose at a record annual 23.1 per cent.

Inflation is being stoked as a steep fall in the pound drives up import costs, by 10.3 per cent year-on-year in March, and stoked by record oil prices, which have breached $130 a barrel.

Still more worryingly, surveys show the public's expectation of future inflation climbing rapidly to record levels. So far, however, there are few signs that this is stoking pay demands, as the MPC has long feared it might.

International economy: slipping

Pessimism over the United States, in the grip of a severe downturn, grew last month as the Federal Reserve sharply cut its forecast for growth, saying that its economy could slow to the brink of stagnation this year. Fear has risen that the eurozone is succumbing to the global slowdown after a strong first quarter, with surveys seen as good indicators pointing to slowing activity.

Rates verdict: on hold

A “no change” decision from the Bank on Thursday is a racing certainty

Three-way split among the rate-setters

A three-way split has emerged on the Bank of England Monetary Policy Committee, with only David Blanchflower, the MPC's arch dove, still voting for a cut in May.

Professor Blanchflower has given warning of a real risk that Britain may fall into recession, arguing that aggressive action is required to prevent this.

Among the other eight members, a gap opened in May between one faction arguing that tumbling house prices would curb growth and that this may quell inflation and a second faction insisting hawkishly that a severe inflationary threat made it vital that the Bank was seen to focus on this and not on dangers to growth.

MPC minutes showed the less hardline group arguing that the impact of weakening property markets ... could be more substantial than implied by the Bank's main forecast of inflation.

Yet Mervyn King, the Governor, has emphasised: “A slowing of demand growth this year will be necessary to ensure that inflation settles around the target.”

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