COMMENT:All eyes turn to Mr Clarke's corset

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The Independent Online
Kenneth Clarke will restate the inflation target on Wednesday in his Mansion House speech. At present it stands at 1-4 per cent for underlying inflation, coming down to 1-2.5 per cent by spring 1997. But just how seriously should the Chancellor's words be taken?

The aim of setting an inflation target is to establish a clear criterion by which policy can be judged - and a penalty, therefore, if it is exceeded. It is an attempt to build up the credibility of the authorities' commitment to low inflation in the eyes of financial markets.

From this perspective, the problem with the UK system is that, for all the new involvement of the Bank of England, power remains with the Treasury. This was graphically illustrated in the controversial 5 May decision to keep interest rates on hold, one widely interpreted as a political response to the appalling local election results the day before. The fact that the economic data have since largely gone the Chancellor's way will not dispel the conclusion the markets will have drawn from that.

From another perspective, the inflation target can be seen as too rigid. Inflation is bound to move up and down in the course of the business cycle. It certainly makes little sense to set a narrowly constrained target for an arbitrary date which might turn out to be the top of the recovery, as Norman Lamont did when he first set the lower range. However, some bounds have to be set if the exercise is to have any meaning at all. There is no point in saying you are going to put on a corset that is so loose it will never restrain.

Mr Clarke's restatement will be closely watched to see whether he is creating get-out clauses for a relapse into an old-fashioned electioneering boost to the economy. But ultimately it is deeds that will count rather than words. This is all the more so since the regime has only had to live with the relatively easy part of the economic cycle, when there is downward pressure on inflation. Mr Clarke may restate the target but the real test is still to come.