View from City Road: Chancellor should ask for a second helping

It rather looks as if Kenneth Clarke was right, and Eddie George was wrong. The best explanation of the quarter percentage point cut in bank base rates is still that it was splitting the difference between a Chancellor who wanted half a point, and a Bank Governor who wanted nothing at all.

If that view is correct then Mr Clarke has a strong case for going back for seconds. Overall, yesterday's data suggests that inflation is still performing rather better than the markets expected, while economic activity is a little weaker.

The Bank of England inflation report assumed that the Government's target inflation rate - the rise over the year in the retail price index excluding mortgages - would hit 3 per cent in January.

The City was expecting 2.9 per cent. And the outturn was 2.8 per cent. Yet again, there are pleasant surprises, confirmed by this week's good figures for producer prices.

If this was new, policymakers should be wary. But the Bank has overestimated inflation more often than not since it began to give its view in the inflation report. It is acting true to its recent form.

The cause for concern remains the labour market. There are now three signals that pay settlements are bottoming out: the official earnings series for services has ticked upwards; the CBI pay databank has nudged up; and Incomes Data Services detects widening dispersion. But these are all within the normal margins of bouncy series. Nor do they yet take account of the bad news from unemployment. If anything, the rise in seasonally adjusted jobless of 16,000 in January is an underestimate of the true position. Using the old seasonal adjustments, unaffected by this year's figures, the rise would have been more than 40,000.

There must now be a big question mark against whether the trend of unemployment is still downwards. It is quite possible that the unemployment figures are telling us that small businesses were much more cautious about hiring in the new year.

Taken together with the soggy figures for manufacturing output and retail sales volume, the economy does not look quite as robust as some have argued. It certainly does not look like a recovery that will power happily through the largest post-war rise in taxes in April at an unemployment-reducing rate. The money markets are hinting at another cut in rates, and that would now make sense.