Britain is enjoying that agreeable phase of the economic cycle, in which growth is robust, unemployment falling and inflation quiescent. Incumbent governments like to believe that these happy states of affairs reflect a beneficial transformation of the economy brought about by their own policies. But in reality the golden age is a purely temporary phenomenon, typical of the upturn which follows any recession.
The challenge for the Chancellor at this stage of the economic cycle is to prevent the recovery developing into a boom - which in turn would be followed inevitably by a bust. Interest rates are lower now than at any time for 17 years, but they will have to rise to prevent the economy overheating.
The Bank of England argued in its quarterly Inflation Report on Tuesday that this point is approaching. But its warning was surprisingly low-key given the frenzied speculation in the City last week that a base rate rise might be imminent. The Bank said that even if interest rates were left alone for two years, the underlying inflation rate would by then only just be above the ceiling of the Government's long-term target range.
The wisdom of the Government's goal - that underlying inflation should be between 1 and 2.5 per cent in the spring of 1997 - is questionable. But it would be novel and desirable if the authorities made an attempt to hit it.
This is more difficult than it sounds. We cannot be certain how great an impact a rise in interest rates will have on growth or inflation, nor how long it would take to have its full effect. The apparent precision of the Bank's inflation forecasts should not disguise the fact that the art of economic policy-making is more broad brush than engraving.
The economists' best guess is that a rise in interest rates takes between 18 months and three years to slow growth and depress inflation. Bearing in mind that the economy is already growing above its long-term trend rate, that the strength of recovery is normally underestimated at this stage, and that companies increasingly believe that they can at last make price increases stick, rates should rise sooner rather than later.
An early rise might convince the City that Mr Clarke is serious about sustaining non-inflationary growth. A rise of a quarter or a half-point would not stall the recovery and could be reversed if tax increases have a damaging delayed effect on growth. But the real test of Mr Clarke's anti-inflationary credentials will be his willingness to resist pre-election tax cuts. That test he is less likely to pass.Reuse content