Here is the bad news: inflation, which in May reached 3.3 per cent, is above the Government's 2 per cent target and rising. The Bank of England expects it to top 4 per cent this year. Inflation expectations are also above target and rising. The Bank's own survey puts public perception of current inflation at 4.9 per cent (against 3.9 per cent in February) and its expectation of inflation a year ahead at 4.3 per cent against 3.3 per cent in February).

Now for the good news. There is none, unless you rejoice in the fact that inflation in the US (at 4.2 per cent) and in the Euro Area (at 3.7 per cent) is even higher than in the UK.

The UK economy is slowing rapidly, depressed by the global credit crunch, declining house prices and the collapse of construction. The household sector has overborrowed quite recklessly, partly in the expectation of ever rising house prices. The UK as a whole is worse off because its exports now buy fewer imports of oil, gas and other commodities. Restoring a sustainable financial position when inflation is running ahead of average earnings growth will mean belt-tightening for many households.

There is nothing that the Bank of England can do to diminish the pain of adjusting to the increase in the relative price of commodities or to the need to restore sustainable household finances. The Government can only redistribute the burden of adjustment, and every day we see interest groups - such as lorry drivers or people living in rural areas who drive a lot - wanting to pass their share of that burden on to the rest of the community,

Mervyn King, the Governor of the Bank of England, has had to write an open letter to the Chancellor, explaining why inflation has overshot the target by more than one percentage point, and what the Monetary Policy Committee is going to do about it. I am underwhelmed by his analysis and his plans for regaining price stability.

Mr King's analysis of the distinction between continuing inflation and the one-off increase in the general price level associated with an increase in relative price of commodities, energy and imports is only one quarter right.

He is correct to point out that there is not a generalised rise in prices and wages caused by rapid growth in the amount spent in the economy. A shock that increases the general price level - for instance, rising oil prices - but does not change the balance between supply and demand does not need to be countered by increased interest rates.

But the Governor does not point out that rising commodity prices have reduced supply relative to demand. Demand must therefore be reduced if inflationary pressures are not to rise. Higher interest rates and a stronger exchange rate are monetary instruments that can reduce the gap between demand and supply.

Nor does the Governor dwell on the fact that world commodity, energy and import prices are more expensive only if sterling's exchange rate does not move in tandem. Sterling has fallen by 12 per cent since its peak in July 2007. The Bank of England is not responsible for the increase in global commodity prices, but it is partly responsible for the fall in sterling that has exacerbated their inflationary impact.

Since last summer the Bank of England has also cut interest rates. Market interest rates, however, including mortgage rates, have risen because of higher risk of default and liquidity risk premiums, but not enough to stop inflation from rising.

Much of this increase in inflation may have been difficult if not impossible to foresee (I certainly did not foresee it). But now that we have experienced the inflationary surge, it is time to do something about it.

The Governor notes that while it would be possible to get inflation back to the 2 per cent target within a year it would be costly to do so. He proposes to steer inflation down slowly to its target over a two-year period.

That is a mistake. It carries the risk that the high and rising inflation expectations of the past months will become firmly embedded and hard to dislodge, except through a long and deep slowdown or even a recession. There is no painless way of squeezing the excessive inflation out of the system, but by acting now - with an increase in interest rates of a per cent or two successive increases of a per cent - the Bank can bring down inflation not only through the “pain channel” (higher unemployment and lower pressure on capacity) but also through the “painless channel” (by dampening expectations of rising inflation).

We face the usual trade-off - less pain up front but more pain cumulatively versus more pain up front and less pain cumulatively. It looks as though the Governor has indicated his preference for more pain later. The Chancellor certainly seems to prefer that. Let's wait and see whether this view will find majority support in the MPC.

Willem Buiter was a member of the Monetary Policy Committee 1997-2000, and holds the Chair in European Political Economy at the LSE

Times Recommends

• Farwell to the stiff upper lip
• It’s about who runs the US, not health
• The Iron Lady and her blue felt-tip sympathy