Presenting the Bank of England’s inflation report on Thursday, governor Mark Carney said he could see “scenarios in either direction” for monetary policy, given rising inflation and risks to economic growth on the horizon.

The BoE revised its headline inflation projection down to 1.8% from 2% for the first quarter of 2017, but it expects price rises to accelerate this year and average 2.7% in 2018, well above its stated 2% target.

However, some believe official estimates are already understating the pace of inflation, based on more reactive online prices.

Online U.K. inflation is already around 3%, according to State Street Global Markets, which sources daily online price data from PriceStats.

“While inflation is forecast to rise sharply later this year, online measures of inflation warn that it is already a growing concern,” said Michael Metcalfe, global head of macro strategy at SSGM.

The BoE also boosted its projection for GDP growth in 2017 sharply on Thursday, from 1.4% to 2.0%, the second upward revision since the Brexit referendum in June 2016.

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The implication, said Metcalfe, is that without the cushion of much slower growth, it is no longer a certainty that monetary policy will be able to remain so accommodative for the whole of 2017.

“The good news,” he said, “is even the possibility of an interest rate hike in 2017 may lend some support to sterling, the weakness of which has been one of the main drivers of higher inflation.”

Sterling has lost some 18% of its value in US dollar terms since the Brexit vote, the BoE noted, though it has regained 3% since November, easing the pressure on inflation slightly.

Still, the BoE’s monetary policy committee, which voted unanimously to leave interest rates and asset purchases on hold on Thursday, reiterated that there are “limits to the extent that above-target inflation can be tolerated”.

State Street’s figures point to a similar gap in the U.S. between market inflation expectations and online prices, which have made an unseasonal surge following the Black Friday shopping campaign in late November, according to the firm.

Credit concerns

The credit market is “mispricing the current headline inflation pick-up”, said Bank of America Merrill Lynch analysts in a note published on Wednesday.

Periods of rising inflation are typically negative for credit instruments, but BAML’s research shows a decade-high divergence between corporate bond spreads and headline inflation, suggesting fixed-income investors have not yet reacted to the risk to their portfolios.

“The reflation trade is strong across Europe and the US with rates moving higher,” they wrote. “The global [quantitative easing] is reaching ‘peak strength’ this quarter.”

“However, the reflation knock-on effect is ultimately negative for credit.”

Euro area inflation jumped from 1.1% to 1.8% in January, the ECB said last month, but core inflation, which strips out more volatile prices such as energy and food, was flat at 0.9%—well below the central bank’s stated target of below but close to 2%.

BAML said it was “notable” that the credit market is still focusing on core rather than headline inflation.

“At current levels,” they said, “we fear that a policy mistake, like the one of the forthcoming April tapering decision, will ultimately be negatively received by credit investors.”

The risk is particularly acute for investment grade corporate bonds, which rallied virtually throughout 2016 in Europe, helped by ECB buying.

This is because rising yields on government bonds as economic data strengthens reduce the need for more risk-averse bond investors to seek higher returns in the strongest corporate names.

At the same time, BAML said cash will also flow towards high yield bonds, because their data show high yield outperforms investment-grade in Europe as rates rise.

“Amid a rising rates backdrop, we see that the balance of flows in the fixed income market will likely favor high yield and govies more than flows into high grade funds.”