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Outlook: Rates standstill

THE SANTA CLAUSES outvoted the Scrooges on the Monetary Policy Committee yesterday and added to the general Christmas cheer. Bustling off to our office parties, or staggering home laden with credit card financed goodies, we'll all be thankful enough for that.

There was a good case for one, however. The vote for no change has only postponed the next increase. The economy is expanding at a fair old pace, even allowing for the usual seasonal pick-up in spending. The jobs market is so tight that steam is escaping around the edges. Vacancies have soared, pay growth is running well ahead of inflation, bumper bonuses are on the way in some industries and staff shortages are growing.

There is also a good deal of heat in the housing market. House price inflation has reached double digits. Running at about twice the typical mortgage rate, that means the real cost of borrowing for home purchase is negative. Purchases of household goods have jumped, and equity withdrawal is on the up once more. The feeding frenzy in the stock market, and the profits being made, is also powerfully indicative of a 1980s-style boom.

These are classic early warning signs of future inflation, and it is after all, future inflation that the MPC is targeting. Today's low inflation is the legacy of its past decisions to raise rates, unpopular as they were at the time. What's more, even though some high street goods are undoubtedly falling in price, it is important not to be misled by the special pleading of the retail lobby.

Retailers hate having to cut prices. They also try to focus attention on like-for-like sales, which exclude the big increases in floor space. Total sales growth is very robust indeed; it is profit margins that have fallen. If times are that hard on the high street, why are so many retailers still be expanding?

Increased competition, the Internet, the more flexible job market, all these things are making the British economy less inflation-prone. Rates will not have to increase nearly so much as in the past to keep inflation on target. But at some point after Christmas the majority on the MPC will have to fling aside their red hats and white beards and vote for higher rates.