View from City Road: Clarke can breathe again - until tomorrow

After the pummelling that the markets gave the Chancellor's quarter-point cut in bank base rates, he can breathe at least one sigh of relief that the first of this week's hurdles has been safely navigated.

The figures for factory gate inflation and input costs were better than expected. Neither figure suggests the pleasant surprises on inflation have ended.

But the Chancellor's troubles are not over.

The big inflation number will come tomorrow with the Retail Price Index, which will rise merely because the cut in mortgage rates this January was smaller than the cut a year ago. The underlying rate, excluding mortgages, may be swollen by Budget duty increases. The Chancellor will be lucky if the headline rate settles this side of 2.7 per cent.

The markets will also watch the Bundesbank council meeting's decision on interest rates on Thursday: a cut would help the pound. But they would be well advised to scrutinise pay just as closely. Pay growth is the ultimate indicator of 'core' inflation: if settlements tick upwards, the price rise has become embedded in the inflationary process. The low inflation-low yield scenario needs well behaved pay growth.

The official earnings figures on Wednesday will give few clues, if only because they are slow to reflect what is going on in the labour market. They capture everyone's pay, including the vast majority of people whose pay does not go up in any given month.

The best indication of trends is given by the CBI's pay settlements databank, which suggests that settlements are still subsiding: 2.2 per cent in manufacturing and 2.5 per cent in services in November, against 3.4 per cent and 3.7 per cent in the autumn of 1992. But Incomes Data Services says that the dispersion of current settlements is broadening, which could be a warning signal.