Outlook: Inflation doves peddle a short sighted message

THERE IS only one sensible reaction to the news, the week after the MPC raised interest rates, that inflation has fallen to its lowest level for 36 years, and that is to welcome it. Low inflation is good news for all of us, spendthrift southern consumers and hardworking northern industrialists alike.

Sadly, the news brought predictable outrage from said industrialists, "give growth a chance" enthusiasts, loud-mouthed polemicists, wrong-footed City traders, Uncle Tom Cobleigh and all. They saw the unexpectedly good inflation figures as proof that the Bank was wrong to increase rates.

So dismayed are some, that they question anew whether the Government was right to have ceded control of interest rates to an independent Bank. Eddie George, Governor of the Bank, is stifling growth and enterprise by pursuing a long dead inflation, they insist.

This now well-worn reaction to a pre-emptive monetary policy is both depressing and extraordinarily short sighted. How quickly everyone seems to have forgotten the lessons of Britain's inflationary past. And how keen are they are to ignore the achievements of an independent monetary policy. Even if rates were to go another half point, or as much as a point, higher than their current level of 5.25 per cent in the coming months, it would be a staggering achievement to keep UK interest rates between 5 and 7 per cent over the course of the business cycle. There has been nothing like it in recent memory.

In truth, a quarter-point rise in the cost of borrowing will make as little difference to industry as it does to the cost of buying a home, but if it helps bring greater stability to the traditional boom and bust of the British economy, it will be a price worth paying. True, the Bank of England's surprise announcement last week did send the pound up once again, but it is also worth recalling that the currency remained strong all the time interest rates were falling. It is not within the power of the MPC to manipulate the exchange rate, nor should it attempt to.

On the other hand, the rise ought to help pre-empt any renewed outbreak of inflation, the early signs of which are all too evident from London's buoyant housing market. It might even have a large enough psychological impact to take the froth out of the boom that has undoubtedly engulfed the South-east and prevent it rippling out to the rest of the country.

General price inflation is falling now - and will continue to do so during the next few months - but there are some broader price pressures in the pipe line. The tight jobs market is raising earnings growth, precipitously in some industries, as many of those media pundits who argue the "give growth a chance" case know only too well. Action now will affect inflation in two years or so. Without that action there would be less good news to welcome in future.