Echoes of 1987 appear in the labour market

"Those who claim the creation of a flexible labour market is capable of producing sustained low-inflationary growth have yet to prove their case"

After the shock of the rise in retail price inflation to 3.9 per cent last week, the latest sales figures were eagerly awaited for evidence of how consumers might be responding to the attempt by retailers to rebuild margins. Fierce competition in the high street has been a key reason why intense cost pressures in manufacturing have not translated into a big hike in retail price inflation.

On the face of it, flat retail sales in September - representing the first annual fall since 1992 - are as clear a response from consumers as the Treasury, for one, might have hoped. You can push prices up, but don't expect us to buy, seems to be the message from consumers. Well, maybe. With both the inflation and sales figures clearly affected by a long, hot summer, it would be premature to conclude that consumers will necessarily have the last word in this tug of war with retailers. For that, we really will need to see more evidence.

In the longer term, the inflationary outlook hinges on the behaviour of the labour market. If there was general surprise in the City at the weakness of retail sales, there was just as much astonishment at the apparent buoyancy of the labour market. The decline in claimant unemployment, which was petering out in the first half of the year, appears to have resumed.

The unemployment count may be somewhat flattered by the effects of the academic year, as new graduates take up jobs or return to higher education. On the other hand, the new rules associated with the switch to incapacity benefit are estimated to be leading to a modest increase in claimant unemployment. The clearest evidence that the labour market is more active than had been thought came from the Labour Force Survey, which showed the biggest increase in a three-month period in employment since it started to recover in 1993.

So far, however, renewed buoyancy in the labour market is not leading to a pick-up in underlying earnings. These grew by 3.25 per cent in August, the same as in July and down on June. Provided this remains the case, we can relax about the prospects for inflation.

This is a big provision. Goldman Sachs has warned that on a wide range of measures - such as the ratio of vacancies to short-term unemployment - the labour market is showing characteristics last seen in early 1987. This was just before wage inflation began to pick up in earnest. Headline inflation may fall next month because of the cut in mortgage rates, but those who claim the creation of a flexible labour market is capable of producing sustained low inflationary growth have yet to prove their case.

Another teaser on competition policy

The Department of Trade and Industry is teasing us again over competition policy, and very irritating it is after all the Government's broken promises on reform over the last six years. Jonathan Evans, the Corporate Affairs Minister, has written to Richard Caborn, chairman of the Commons trade and industry committee, suggesting an important change in the way competition is policed. The DTI, he says, is drawing up proposals to make the Office of Fair Trading behave more like a single competition authority which both investigates problems and implements the remedies.

The role of the Monopolies and Mergers Commission would then be to give an independent judgement where cases are contested. According to Mr Evans, "this may require some rebalancing of the roles of the OFT and MMC, giving the latter a primarily adjudicating role". This is a significant shift, at a time when the Government is fighting off suggestions from Mr Caborn's committee, from Labour and from Sir Bryan Carsberg, the former director general of the OFT, that there should be a single competition authority.

Mr Evans opposes any radical reform like that. But his letter gives a lot of ground to critics of the present system. The more important issue, however, is whether the competition authorities - whatever form they take - should be given more power to act directly against abuses. In the UK, the emphasis is on lengthy investigation followed eventually by action, usually in the form of a ban against repeat offences. The prohibition system common on the Continent tends to ban anti-competitive practices first and then argue about them in court afterwards.

There is a consensus that more prohibition is needed in the UK, a consensus which Mr Evans seems to go along with at least to some extent. It is when it comes to the detail, that the practice seems to fall short of the rhetoric. Mr Evans does indeed envisage an OFT with strengthened powers of investigation, the ability to demand undertakings from companies as an alternative to MMC investigations, and powers to make interim relief orders banning undesirable activities.

But other important changes to strengthen the OFT, which the Government, the Opposition and Sir Bryan all agree are desirable, have been promised by DTI ministers in announcements in 1989 and 1993 and there is still no sign of them appearing in a Queen's Speech. Mr Evans may well believe what he says about strengthening the OFT, but does his boss, Ian Lang?

Testing times ahead for Body Shop

Has The Body Shop passed its sell-by date, as the collapse in half-year profits and steadily declining share price would indicate, or is this just a temporary aberration? In time-honoured fashion, Gordon Roddick, chairman, describes what is plainly proving a difficult year as one of "consolidation". That is usually code for worse to come. For the time being, however, Mr Roddick continues to insist there will be little overall change in profits for the year. With like-for-like sales more or less static, losses in the US mounting, and costs spiralling, it is hard to see how this can be the case, but who knows, he could be right.

The big question, however, is not so much where short-term profits are heading as whether Body Shop's retail concept - revolutionary enough in its time - has outgrown its shelf life. Body Shop clearly believes not, for it is continuing to expand at breakneck speed. Some 90 new stores were opened in the half-year, taking the total to 1,300 worldwide. For the time being the expansion has stopped generating profits growth, but it is only a matter of time before that picks up again too, Body Shop insists. We'll see.

The test will be at Christmas. This all-important trading season is not going to be an easy one for Body Shop. Its green credentials have been challenged, and, however unfairly, some of the mud has inevitably stuck. Meanwhile, other more traditional retailers of toiletry and skin-care products have made great strides in introducing their own environment- and animal-friendly lines. Body Shop no longer has the free ride it once did.

As a small niche player on the high street and in the shopping malls, there was always going to be a good place for Body Shop. More questionable is whether the company's limited product range and brand name can sustain the international retail organisation that Body Shop aspires to be.