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What's Really Going on With The English Economy?

On Thursday, The Bank of England didn't change its key interest rate or modify its monetary easing related to asset purchases.

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A steady course from the central bank may sound like a vote of confidence for the economy— but the reality may be more complex.

Here is the rub: Inflation in England seems to be picking up—and, on the growth side of the equation, the future of the British recovery remains uncertain.

The language describing inflation in today's Wall Street Journal is rather restrained:

"Prices have been rising at a faster rate than the central bank's 2% target in 41 out of the past 50 months, and inflation is forecast to remain above that level throughout next year. That means there is a risk that wage demands will increase, setting off a fresh round of price gains as businesses look to cover their higher costs."

But the pattern seems relatively clear. Clear enough, at any rate, for the BOE to hold rates constant.

The growth story is nuanced as well.

AFP, a French wire service, reports on the numbers:

"Britain's economy expanded by a robust 0.8 percent in the third quarter compared with the previous three months, and expanded 2.8 percent compared with a year earlier."

So recent growth rates in Great Britain have been relatively solid.

But the forecasts seem headed in the wrong direction:

"However, the government expects growth to slow more than expected in 2011 and 2012 as sweeping austerity measures begin to bite."

The unemployment rate in the U.K. is currently a little over 7.5 percent. That rate may be lower than what we are experiencing in the United States— but that number is near a 15 year high.

(Brits remain culturally sensitized to unemployment: And with good reason. In the early 1980's, unemployment rates soared to 12 percent—and remained in or near double digits for five years.)

And here's a flag that things are a little confusing—even for the economists: A three way split in the Bank of England's Monetary Policy Committee, which is analogous to the FOMC at The U.S. Fed: "That lack of clarity about the outlook for prices resulted in a three-way split in the MPC's vote at the October and November meetings, with Adam Posen calling for an expansion in its quantitative-easing policy of buying bonds with freshly created central-bank money, Andrew Sentance for a modest rise in rates, and the majority opting for no change."

Also, the British Pound Sterling has been weakening.

The upside of currency depreciation is that it could lead to higher export demand: "Central-bank officials have long expressed hopes that the 25% depreciation in sterling since the start of the financial crisis would boost demand for U.K. exports, helping to fuel the recovery."

The downside, of course, is the potential loss of purchasing power for British consumers, especially related to commodity prices.

The situation in The U.K. is still far from a stagflation apocalypse. But some of the data are enough to make you wonder about the trends.

In a phrase much in vogue in the popular culture: It's complicated.

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