U.K. investor attention will be on the Bank of England's monetary policy committee (MPC) when it meets Thursday as the group tries to balance inflation and the threat of a recession.
When BOE Governor Mervyn King presented the latest Bank of England Inflation report earlier this month he said: "the MPC is facing its most difficult challenge yet. For the time being at least, the nice decade is behind us."
With oil prices surging, a number of weak housing and retail surveys out this month and retail inflation expected to peak between 3.5 percent and 4 percent in the third quarter -- remaining above 3 percent perhaps until early 2009 -- the MPC looks to be in a bind.
Interest rates are currently at 5 percent and with an 8-1 decision against cuts last month the MPC seems unlikely to make any adjustment.
Legendary investor George Soros, chairman of Soros Fund Management, said the situation the Bank now finds itself in is “like a Greek Tragedy."
"Right now the Bank of England has to keep interest rates steady until you have a recession," Soros said, speaking at an event at the London School of Economics earlier this month.
So, faced with almost certain gloom the market seems unanimous that the BOE will be forced to keep rates steady.
"A cut now is simply not on. Nor would it help policy credibility. I don't actually think UK inflation (or Euro Area or US) is generic or sustainable into this cycle, being quite localised (food and energy)," George Magnus, Senior economic advisor to UBS said.
"But it’s not trivial, and there could be a wage/salary response, especially if unions see an opportunity to challenge a weak government, with a reputation now for indecision. I'm not convinced this is inevitable but the risk may be reason enough for the Bank to hang tough-ish,” Magnus added.
Expectations that interest rates will be lowered are beginning to fade.
"I’ve been dovish up until now but we've run out of room," Geoffrey Dicks, chief UK economist at the Royal Bank of Scotland, told CNBC.com. "Inflation is worse than expected and any hope of a rate cut vanished with the CPI print. It’s always hard to cut rates when we're writing letters (explaining high inflation to the Treasury)."
Meanwhile, David Bloom, global head of foreign exchange strategy at HSBC, said that whilst he is expecting no change this week, the economy in the UK is going to be "dire enough" that inflation won't seep into the economy, but disappear and that the Bank of England will eventually have to cut rates.
"The committee should concentrate on growth and get the economy back on track," Bloom told CNBC.com.
But Geoffrey Wood, professor of economics at Cass business school, who spent two years as Visiting Economist with the Bank of England, where he is currently a special advisor on financial stability thinks that "there’s no evidence of a dramatic slowdown in the economy yet. There was excess money growth in the UK and if it were not so, then sterling would have been stronger and commodities would have been much cheaper in sterling terms."
"If anything the Bank should raise rates," Wood told CNBC.com. "Inflationary pressures are very substantial and I think something should be done about it and done now."
“It’s next year that it (the interest rate) has to come down," he said. "There is a delicate balance between the real economy and inflation which has shifted a lot."
"Inflation will prove a bit stickier that some are expecting," he added. "It is a bigger and lengthier spike than last time."
Consumers Shutting their Wallets
In the real economy, retailers have started to feel the effects of consumers shutting their wallets, with department store John Lewis announcing last week that half of all its department stores saw sales fall by 10 percent or more in the week leading up to the Bank Holiday weekend.
Meanwhile, house prices in May fell at a rate of 2.5 percent, the fastest monthly pace for a drop on record according to the Nationwide house price survey.
More falls in prices this year are expected, Fionnuala Earley, chief economist at Nationwide told CNBC Europe. But investors shouldn't put too much emphasis on one month's number adding that "at this stage it is still a correction of a buoyant market we have had over the last few years."
It was only last month that economists were predicting with near certainty that the MPC would cut rates in June. Then the inflation report arrived.
But not even inflation can truly reflect the state of the economy with many calling for changes not only to the Bank's mandate, but to what is included in the inflation figure. Some argue that high oil and commodity prices distort the number. The real test for the BOE now is how it attempts to solve the situation.