IT’S one thing when consumers grumble about inflation. It’s quite another when a troika of central bankers agrees that inflation might be getting out of hand.

European Central Bank boss Claude Trichet is dropping broad hints that he will act on his concerns and raise interest rates next month “to anchor inflation expectations”. Mervyn King, the Bank of England governor who fears “moral hazard” more than he does a recession, says: “We are now facing a period of rising inflation.” And the biggest gorilla in the international banking community, Ben Bernanke, chairman of the US Federal Reserve Board, tells an audience in Massachusetts that “the latest round of increases in energy prices has added to the upside risks of inflation and inflation expectations”, and that the Fed “will strongly resist an erosion of longer-term inflation expectations”, which for investors means, “I will raise interest rates if the slowing economy does not ease price increases”.

The concerns are not unfounded. Consumer inflation is running at about 4%. Developing countries, which have been providing Wal-Mart with low-priced imports to keep consumers’ costs down, are now raising their prices in response to domestic inflation.

If you think that the statements of the central bankers mean that peace prevails in international finance, think again. Bernanke hoped that his statement would shore up the dollar, which would ease oil prices because each dollar the producers received would be worth more to them. But Trichet’s statement strengthened the euro and drove down the dollar, causing more than a little consternation at the Fed and in the halls of the US Treasury.

And if you think that these comments mean that inflation is a danger because the economies of Europe and America are overheating, think again. In fact, the euro-area economy is slowing, Britain is about to reclaim the title of the sick man of Europe, and America . . .

Here the story is more complicated, which is why Bernanke devoted most of his speech to a candid review of what he doesn’t know. He isn’t really sure of the effect of commodity prices and rising wages on inflation, and “there is much we do not understand about inflation expectations”. Not much reassurance there for those who think the Fed chairman’s hand is firmly on the tiller, steering the economy between the twin shoals of inflation and recession.

But despair not. Bernanke’s knowledge might be imperfect, but his judgment seems fine. He has so far used all the tools available, and invented new ones, to prevent the credit crunch from morphing into a full recession. And he believes that because of his aggressive interest-rate cuts – Bank of England take notice – “the risk that the economy has entered a substantial downturn appears to have diminished over the past month or so”.

The latest retail sales figures, released after Bernanke’s speech, support the Fed chairman’s views. The increase was twice what analysts were expecting. It seems that more than was anticipated of the $56 billion in tax rebates distributed so far is ending up in shop tills. “It’s just amazing – the American consumer’s resilience in the face of everything negative,” Stuart Hoffman, chief economist at PNC Financial, told Bloomberg Television.

That doesn’t mean we can safely ignore the word “substantial” in Bernanke’s statement that the risk of a substantial downturn seems to have diminished. This still leaves room for a nonsubstantial downturn. The Fed’s monthly report on business conditions around the country is dotted with “softer, weaker . . . slower, sluggish” from seven of the twelve Federal Reserve districts; the five others report “stable” activity. Whether the overall slowdown will become a recession is the question that is puzzling analysts. Highly respected Martin Feldstein thinks it will – “We’re heading for a recession,” he told a meeting of investors.

The dominant worries are petrol, housing, and banks. Although petrol on average claims only about 4.5% of consumers’ budgets, these prices are posted on huge signs that consumers see several times every day. And the 4.5% is only a nation-wide average. Low-income consumers in rural areas, often driving long distances to get to work or the super-market, are especially hard hit.

Housing remains a problem. Large inventories of unsold houses overhang the market, and prices continue to sink. The only thing going up is the number of foreclosures. But all is not gloom. Eddie Lampert, the billionaire hedge-fund operator, has become optimistic enough to invest part of his $11 billion capital pile in housebuilders and mortgage lenders. And in April the number of signed sales contracts rose to its highest level in six months. Signings were still 13% below last year’s at this time, but drowning estate agents grasp at whatever straws they can.

The banks continue to sell off their worst paper, albeit at deep discounts, and to raise capital, albeit by paying a handsome price for it. As new capital flows in, and investors are convinced that the last shoe has dropped – that the banks have finally booked all their losses – the financial institutions should be able to begin lending more normally.

All this adds up to an economy that is treading water but not sinking. The stimulus checks have given the economy added strength, but when that temporary boost wears off, its ability to stay afloat will depend on an easing of petrol prices, a recovery of house prices and sales, continued recapitalisation of the banks, and consumers’ willingness to continue spending, which in turn will depend on a strengthening labour market.

Irwin Stelzer is a business adviser and director of economic policy studies at the Hudson Institute.

Times Recommends

• Unemployment rises at fastest rate in 17 years
• Alchemy leads in Fraser and Mosaic bid talks
• US and UK shares slump as recession looms