While an end to the recession is to be welcomed, it is only the first step in the recovery process. There is still some way to go before the economy is ‘back to normal' - ie growing at its trend rate of around 2.5% a year.

Also, the now widespread view that public sector spending has to be reduced could curb the one part of the economy that has kept going over the past 12 months. The TUC has expressed the view that cuts in public services will lead to a ‘double-quick, double-dip' recession.

Even allowing for the TUC's obvious vested interest in keeping government spending going, there is some substance in this argument, although timing is the key.

Once there are clear signs of life in the private sector, there is a good economic case for slowing public sector growth. Since much government spending is planned well in advance, however, steps to rein in government spending are not likely to be implemented in the short term.

Inflation target
Notwithstanding the recent weakness of output and employment, the inflation target remains the Bank of England Monetary Policy Committee's (MPC) overriding objective. And while many companies have seen costs rise and margins squeezed because market conditions have prevented them increasing prices, inflation has remained higher for longer than many people expected.

In fact, it was when the recession started, in the second quarter of 2008, that inflation breached the 1-3% target range for the first time since the MPC was formed in 1997.  The CPI then remained above 3% until February this year.
Although it has since come back down and is currently

a tad under 2%, compared with countries like France and Germany (where inflation has been under 1% for most of this year), it is still high. So, if any price pressures start to build, they will be on a higher base than elsewhere, which could have implications for interest rates and, therefore, growth.

There are several ways inflation can come into the system. A traditional route for the UK is via imports of oil, commodities and manufactured goods. Once the global economy starts to recover (and there are clear signs this is now happening), raw material and commodity prices will firm up and rise. The oil price has already doubled from the $34 a barrel price of last February, while commodity prices have risen by one-third.

Even if commodity prices didn't rise, a weaker exchange rate would push up the cost in sterling terms of imported materials, which manufacturers and retailers would probably find hard to absorb.

New threat
A final and much newer threat to price stability comes from the £175bn of quantitative easing that the Bank of England has been undertaking since the spring. In the space of nine months, the Bank is injecting the equivalent of 12% of the GDP into the economy through the banking system.

Without a commensurate increase in the supply of goods and services, it is easy to see how fears of inflation could arise. For the moment, however, the MPC has taken the pragmatic view that the short-term risk of deflation outweighs the medium-term risk of inflation.

But if inflation does come back and the CPI starts to rise above 3% again, will the MPC regard price stability as its top priority and raise interest rates? If it does, then the risk arises that rates are increased before the recovery has taken a firm hold, which could stifle the nascent upturn at birth - hence, the fear of a double dip.

The hope must be, however, that having been caught out by the speed of the downturn last year, Mr King and his colleagues will want to avoid responding too soon to the emerging price pressures. As Oscar Wilde might have said, to misread the cycle once is unfortunate, but to do so twice might be considered careless.

Dennis Turner is chief economist at HSBC