Inflation could cause problems for Clarke

Kenneth Clarke deserved some applause at the Tory Party Conference for his management of the economy, but whether he really merited a full four minutes of standing ovation is rather more questionable. Two pieces of news yesterday signalled problems on the horizon.

September's inflation figures showed that the UK does not meet the often- overlooked Maastricht Treaty criterion for inflation. To qualify for the single currency, inflation needs to be within 1.5 percentage points of the average of the EU's three lowest inflation rates. The average for Sweden, Finland and Luxembourg is 0.5 per cent. On any measure, British inflation is too high by comparison. It remains above the EU average, an average which is raised by wayward Greek inflation.

This explains yesterday's second noteworthy event. Spanish government credit is now as good as British government credit, probably for the first time. The yield on the Spanish government 10-year stock maturing in April 2006 dipped below the yield on Treasury 7.5 per cent 2006, maturing in December that year. It took a late rally in gilts to bring the UK stock just back to level pegging by the close of business.

Adjusting for accumulated interest, the UK and Spain both now yield 160 basis points (1.6 per cent) more than the equivalent German stock, which yields 6 per cent. Portuguese debt rates alongside Spain, Irish government debt yields only 68 basic points more than German "bunds", while France, by dint of immense efforts to massage the government deficit, now offers 8 basis points less than Germany. Only Italy, of the countries likely to qualify for early entry to the single currency, still has to offer investors higher yields than the UK.

This is only the verdict of markets and markets are not always right. But most of the time, they are. Michael Portillo's forefathers should, perhaps, have stayed in Spain.