Jeremy Warner Outlook: Britain's bout of inflation looks tame enough

Allen's challenge; Westland's future

Inflation isn't dead. It's only been sleeping and it is about to rear its ugly head again. Two sentences that broadly summarise press reaction to news this week that the Bank of England's Monetary Policy Committee considered raising interest rate by a full half point at its last meeting in early May. Figures yesterday from the British Bankers' Association, showing that mortgage lending rose at a record pace last month, seem only to support the view that the British economy has become dangerously overheated, requiring much firmer and swifter interest rate action than hitherto expected.

Inflation isn't dead. It's only been sleeping and it is about to rear its ugly head again. Two sentences that broadly summarise press reaction to news this week that the Bank of England's Monetary Policy Committee considered raising interest rate by a full half point at its last meeting in early May. Figures yesterday from the British Bankers' Association, showing that mortgage lending rose at a record pace last month, seem only to support the view that the British economy has become dangerously overheated, requiring much firmer and swifter interest rate action than hitherto expected.

I've long thought the "expert" view on inflation too sanguine. Few business leaders in the industrial and retail sectors are yet able to say there's been any great return of pricing power. Yet in many services, in wholesale financial markets and in business support, inflation is back with a vengeance. Forget demographics, shortage of supply and the rest, the chief factor behind the red-hot housing market is the easy availability of exceptionally cheap credit. This was bound to have wider inflationary implications eventually, and so it is proving.

With rising commodity prices, rapid growth, exceptionally low unemployment, and now quite sharply rising earnings, all the classic ingredients are in place for a renewed uptick in headline inflation. The Bank of England's latest Inflation Report forecasts as much, with inflation due to breach the Government's target in two years' time even if interest rates rise in the way the markets expect.

Yet I cannot go along with the view that there is any great cause for alarm. If there have been policy errors by the Bank of England, then they are arguable and only at the margin. In the long run, they are unlikely to make much difference to the way things pan out.

Indeed, we seem so far away from the errors of the past - where the monetary authorities always seemed to be at least two or three steps behind the economic cycle, marching interest rates up to the top of the hill one moment in response to an inflation they hadn't seen coming, only to march them rapidly back down again to address the consequent bust - that there is no comparison what so ever.

Even if the repo rate rose as high as 6 per cent in the present cycle, which represents the upper limit of any credible forecast, the trough to peak change in rates would still be exceptionally shallow compared with the wild swings that used to occur in the 1970s, 80s and early 90s. The fast-rising oil price is obviously a worry, but by reducing the amount of money available for spending elsewhere, the impact is likely to be as much deflationary as inflationary.

As Kate Barker, a member of the Monetary Policy Committee, intimates in our interview on page 53, the policy error the Bank of England must avoid at all costs is a tightening so sharp that it causes widescale layoffs and a big rise in unemployment. Then we really would get that much-feared housing market crash. As a consequence she's not in favour of shock therapy for the housing market, in contrast to her fellow MPC member, Andrew Large, who thinks this the only way to bring house price inflation under control.

Yet she concedes that inflationary pressures have risen and that markets are right to draw the conclusion that rates may have to rise a bit further and faster than previously thought. The difference, however, is only one of degree. People are going to feel a little less well off in the environment that now looms, but if they have still got their jobs and inflation remains under control then that's going to look more like a triumph of policy than a failure.

The big threat, hanging like a sword of Damocles above us all, is the housing market. How significantly will the real economy be affected when house prices fall? With luck, the effect will be quite limited, but no one really knows. It's a glib sign-off, I know, but the only honest one; only time will tell.

Allen's challenge

Dead man walking? If ITV was a football club, yesterday's statement of support from Sir Peter Burt, the chairman, for his chief executive, Charles Allen, would have been read as proof positive that Mr Allen is about to get the chop. In football, the grapevine is so much more reliable than the stuff and nonsense that tends to emerge for public consumption from the horse's mouth. Thus an expression of absolute confidence in the manager should be read as confirmation that the knives are out.

Should Sir Peter's statement be read in the same way? As Mark Thompson, the new director general of the BBC, yesterday proved, you really cannot trust these media types. Only last month he said he hadn't been approached nor would he be interested in the job even if he was. Well, there's a thing.

In the City yesterday, many were dismissing Sir Peter's vehement denial of the story that Mr Allen was under renewed threat as weasel words. Sir Peter said that Greg Dyke hadn't been approached for any role whatsoever in ITV, but he didn't say ITV wouldn't approach him at some stage in the future. Sir Peter also said that he had an excellent team in Charles Allen and his colleagues who are performing well and making good progress. But he didn't say there was no question of seeking an alternative.

The truth is that however hard Sir Peter tries, he will never entirely put the lid on the story that the ultimate intention is to bring in a new chief executive. Mr Allen has a few friends within ITV, but not many, and whereas there is some gratitude in the City for the manner in which he steered the merger of Carlton and Granada through the regulators, it is grudging.

The bottom line is that Mr Allen is an accountant, not a media rainmaker. There has to be a concern about his ability to articulate and execute a growth strategy for ITV once the present round of merger-inspired cost-cutting comes to an end. Mr Allen's medium-term goal seems to be to achieve further cuts in the regulatory burden on ITV. This should help make the company more profitable but it doesn't address the core strategic challenge for ITV which is how to maintain and grow revenue in an age of ever greater broadcast media fragmentation and choice. Mr Allen has still got a way to go before he can rest easy in his bed.

Westland's future

Does anyone care that Westland, one of Britain's last remaining independent defence contractors, is about to fall under foreign ownership? In March, General Dynamics of the US acquired Alvis, Britain's only maker of tanks and armoured vehicles, in a £309m deal. Four years ago, the French contractor Thales paid £1.3bn for the defence interests of Racal. Now GKN's Italian joint venture partner in Augusta Westland, Finmeccanica, wants to buy out GKN for a mooted £1.1bn.

There are other possible suitors for Europe's biggest military helicopter manufacturer. Lockheed Martin and Bell Helicopter, Westland's partners in the bidding for a giant US contract which would include supplying the White House with a new presidential helicopter, are both watching developments with intense interest. So too is Sikorsky, the only rival for the contract. But either way, Westland seems destined to follow others overseas, which in time will make its Yeovil base in Somerset into little more than a screwdriver plant. Does it matter? The Government doesn't seem to think so.