Britain's economists are divided over the nature of people's inflation expectations and how they will affect the future direction of prices.

Britain's economists are divided over the nature of people's inflation expectations and how they will affect the future direction of prices.

In a stark illustration of the issues faced by the Bank of England rate-setters, a hearing of the Treasury committee held yesterday just minutes after the Bank revealed inflation had hit 3.3%, heard differing views from economists on where it is headed.

Heriot Watt University vice-chancellor Anton Muscatelli told MPs there is a risk that people will begin to see current inflation levels as the norm and demand pay increases to match.

"Unless we see inflation falling later on this year... we will see inflationary expectations stick at the current levels which are around 4%."

He argued that there is a 50/50 chance that energy prices could continue rising for the rest of the year, keeping inflation high.

Danny Quah, professor of economics at the London School of Economics, backed the idea of keeping interest rates high to convince people that inflation would stay low.

He added: "We have to accept we are going to be a little poorer as a country."

But the view from the City economists in attendance was that slowing economic growth will curb inflation.

Bronwyn Curtis, chairman of the Society of Business Economists, said: "As the economy slows we will get unemployment ... and there will be much less pressure pushing for wage hikes."

Roger Bootle, of consultancy Capital Economics, added that if the Bank doesn't cut rates quickly enough as inflation subsides there is a risk "the economy will be extremely weak, perhaps in recession" and said inflation could fall well below the Bank's 2% target.

The two groups put their own interpretation on the open letter from Bank Governor Mervyn King, published yesterday explaining the hike in inflation.

Professor Muscatelli highlighted King's emphasis that inflation is likely to remain above the Bank's 2% target "well into 2009"

compared to earlier predictions that it would be early 2009.

Meanwhile, professor Quah said: "I read this as a statement that the Bank is standing ready to raise interest rates."

Bootle and Curtis both declared the letter "fairly doveish" and Bootle added that the emphasis on fuel and food prices pushing up inflation showed the Bank was not inclined to raise interest rates.