LEADING ARTICLE : We've got the low-inflation blues

Kenneth Clarke may be feeling rather chuffed. On the same day that we find out that unemployment fell by 29,000 last month, the Bank of England announced that inflation should meet the Government's target of 2.5 per cent by the end of this Parliament. This marks an important moment in the Chancellor's sometimes tense relationship with the cautious Bank. In previous issues of its quarterly Inflation Report, the Bank had not been much help to the Government, concluding that inflation would probably overshoot the target by the time the election comes. Last summer, that led Governor Eddie George to call unsuccessfully for interest rates to go up. He muttered unhappily when the Chancellor cut rates twice in recent months. Now Mr Clarke's judgement seems to have been vindicated. In yesterday's Inflation Report, for the first time, the Bank has endorsed his approach.

So even if the country is not enjoying much of a feel-good factor, the Chancellor should at least feel comfortable. The Bank's endorsement will strengthen him politically in his fight against critics in his own party. The success of the British economy stands in contrast to the slowdown in continental Europe, brought on by efforts to rein in public spending to meet the Maastricht criteria for economic and monetary union. Continued low inflation and economic growth this year could pave the way for lower interest rates and an expansionary budget. If this is combined with the windfalls that millions of savers might get from building societies which turn themselves into banks, then the scene could be set for a mild consumer boom.

All that will help John Major considerably as he attempts to calm Tory nerves and narrow Tony Blair's lead in the opinion polls. However, the real prize is much larger than that. Optimists hope we have reached a low-inflationary nirvana, in which we manage to grow the economy without running into the old boom-and-bust cycle which dogged it from the mid- Sixties to the early Nineties.

While the Bank is prepared to back Mr Clarke's judgement of the short term, it is far from convinced about the long-term outlook on inflation. It is still worried about inflation picking up when consumer spending accelerates, as the Bank and Treasury economists expect later this year. It is quite possible we will find ourselves back in the grip of a boom- and-bust cycle once more.

Even the Bank concedes, however, that structural changes in the world of work may have made it easier for Britain to combine low inflation and falling unemployment. The decline of unionisation and union power, the growth of part-time and flexible working, down-sizing and the endemic insecurity it has brought have all reduced the pressure for higher pay. Put simply: many people, even middle-class, white-collar skilled workers, are glad to have a job in the first place and feel in no position to haggle about pay. If you think you are about to be sacked, you will not start pleading for a pay rise. Margaret Thatcher may be gone, but the labour market she envisaged in the early Eighties is now with us - with a vengeance.

One would imagine that the Tories should be celebrating. But it is far from obvious that they will be the political beneficiaries of the new labour market, even if it does deliver the low inflation which, for so long, has been the holy grail of economic policy. Job insecurity is hardly a vote-winning slogan. And for the 1.1 million people with negative equity, low inflation is a nightmare. They would like a bout of inflation to reduce their debts. So even if we have reached a low-inflation nirvana, it should be no surprise that we feel disappointed by the experience. As the Chancellor, Mr Clarke will feel chuffed; as a politician, he will still be worried.