Michael Harrison's Outlook: Dear Chancellor... the letter King hopes he will not be having to write come Christmas

Tesco takes top spot in non-food retailing; Still scope for growth from Aviva

The Governor of the Bank of England is sharpening his quill pen. He thinks there is a 50:50 chance that he will have to write a grovelling letter to Gordon Brown in the next six months explaining why inflation has breached the 3 per cent limit.

If Mervyn King does end up putting pen to paper, then he will at least have the consolation of being able to point out that the main reason for having to do so is the increase in student tuition fees which the Chancellor of the Exchequer himself was instrumental in foisting upon us.

The 150 per cent hike in the university fees is playing havoc with more than just middle class family finances. It threatens to push the consumer price index more than 1 per cent above the Bank's target rate of 2 per cent - thus triggering the obligatory letter.

The latest fan charts lovingly drawn up by the Bank's graphics department (and reproduced on page 36) also show there is a theoretical chance of the CPI dipping below 1 per cent.

Since the target is a symmetrical one, that too would put the Governor in letter-writing territory. But the likelihood of inflation falling that much is vanishingly small and would require the oil price to drop through the floor and wage claims to go into reverse.

For now, the threat to inflation is clearly on the upside and that means interest rates are likely to be heading further north too. The question posed by last week's quarter point increase was whether it constituted a one-off pre-emptive strike or the first in a series. The answer appears to be the latter.

The Bank's latest Inflation Report indicates there is likely to be one more rate rise this year, followed perhaps by another one next year. Even so, this is actually less than the markets had priced in last week, with the result that the pound fell yesterday on the foreign exchanges.

The Governor is unrepentant about what that would do to the level of personal bankruptcies and resistant to the notion that last week's increase in rates was in some way insufficiently well-signposted to the City.

Another important directional indicator will come next week when the Bank reveals how the seven-strong Monetary Policy Committee voted last week. Despite the Bank's best efforts not to give any clues away, some economists believe that the language used in the Inflation Report points to the vote having been decisive. In which case, the hawks will be in the ascendant. Time to tell the kids to take that gap year after all, perhaps.

Tesco takes top spot in non-food retailing

The Tesco juggernaut rolls on. Not content with being Britain's biggest grocer, Verdict now predicts that it will overtake the combined Argos and Homebase this year to become the country's largest non-food retailer. Supremacy in online retailing surely cannot be far behind for Sir Terry Leahy.

That said, Tesco's share of non-food retailing will be nothing like the 30 per cent plus that it commands of the food shopping market. Verdict calculates that Tesco will account for 3.6 per cent of non-food sales by next year - a whisker ahead of Argos/Homebase on 3.5 per cent, with Dixons, or Currys.Digital as it is now known, in third place on 2.9 per cent.

Tesco's leadership of the non-food market will also largely be the result of traditional retailers failing to grow rather than it expanding at a breakneck pace. Verdict reckons that outside the supermarkets, the non-food market will increase by less than 1 per cent a year.

Nevertheless, it will be another stick with which the anti-Tesco lobby can beat Sir Terry. And another wake-up call to the opposition, in particular the resurgent William Morrison, which has a very limited presence in the non-food sector.

For Tesco has the power to ratchet up the competitive threat at will. Half of all the new space it is now developing is dedicated to non-food ranges and this year alone it will open 28 new Extra stores where shoppers can buy anything from a school uniform to a colour television. After that will come a Tesco catalogue and online sales of non-food ranges.

The small saving grace for traditional retailers is that Tesco seems unlikely to develop a big chain of stores dedicated to selling non-food items only, believing that the real driver of customer footfall remains the weekly shop.

Still, it is food for thought for the likes of Argos and even John Lewis. The ambitions of Tesco now extend to almost every corner of the retail market - up to and including furniture and large electrical items. For its smaller competitors, the prognosis is worse. After Allders, Courts and, last week PowerHouse, there are surely more casualties about to occur.

Still scope for growth from Aviva

When Richard Harvey's tilt at Prudential turned to dust earlier this year, the talk was of how Aviva, the owner of Norwich Union, had run out of scope to achieve profitable growth on its own. There was even speculation that the predator might become the prey as rival insurers sensed Aviva's weak spot.

Yesterday, its chief executive responded to the sceptics in the best way he could with a forecast-beating set of figures which suggest Aviva is not about to go ex-growth just yet. Sales in the UK life and pensions division were up 43 per cent for the first half of the year, margins were up 2.9 per cent and profits up 6 per cent.

The picture was similar in the general insurance division where Aviva made a record operating profit of £8 on every £100 of premium income it brought in. Since the group's target is an operating ratio - costs and claims as a percentage of income - of 98 per cent, that demonstrates how well it did.

Norwich Union's "quote me happy" advertising campaign has certainly left Mr Harvey with a smile on his face. The relatively pain-free integration of the RAC roadside breakdown business into its general insurance division also seems to be paying dividends

Aviva has had the benefit of a following wind in the shape of favourable weather and pension reforms but so has the rest of the industry and its figures have still outshone many of its rivals. Last month's results from the Pru, for instance, were fine as far as its Far-East and US businesses were concerned, but the performance in the UK was lacklustre to say the least.

Mr Harvey will not say whether he is still hankering after that transforming merger deal. For now he has his hands full demonstrating that last month's $2.4bn acquisition of the American insurer AmerUs was not deal-making on the re-bound but a carefully thought through expansion into one of the fastest growing areas of the US long-term savings market - indexed annuities.

Until AmerUs has been successfully digested, his shareholders will be reluctant to let Mr Harvey expand his insurance empire much further. For now he is demonstrating that there is still life and growth left in the business as it stands.

m.harrison@independent.co.uk