Outlook: An inflation busting number that leaves MPC in a quandary

EdF/Seeboard; Pearson/FT Business

Low unemployment, low inflation, high consumption and a booming housing market. What better combination of economic circumstances could you possibly wish for? Well, no one wants to be a wet blanket, but whenever things get as rosy as this, the pessimist in all us is bound to say it cannot possibly last.

Don't take our word for it. Just look at what the stock market is saying. Down another 1.2 per cent yesterday to levels not seen since the immediate aftermath of 11 September, leading stock prices are beginning to point to a prolonged period of economic disruption, not just the short, sharp shock that until recently seemed the most likely outcome.

Is there anything policymakers can or ought to be doing? It is hard to recall a time when the Bank of England's policy dilemma wasn't thought of as particularly acute. The economy always seems to stand at a crucial crossroads of some sort with commentators agonising over which direction should be taken. But this time around, the old description seems even more apt than usual. Figures published yesterday show that inflation in May was as low as it's been since records began in 1975. To some extent this is a statistical blip. This time last year, petrol and some food prices were unseasonably high. All the same, with the targeted rate of inflation at just 1.8 per cent, the inflation figure is just 0.3 percentage points away from the level that would require the Governor of the Bank of England to write to the Chancellor to explain formally why he is undershooting the target by so much.

Factor in mortgage costs, and the number looks even tamer at just 1.1 per cent. Under the harmonised European measure, it is better still. At a mere 0.8 per cent we are quite close to Japanese levels of price abeyance. Interest rates are set to influence price inflation not as it stands now but two years out. So to some extent what's happening now to inflation is irrelevant. All the same, with inflation as tame as tame can be, the Bank of England will find it harder than ever to justify the higher interest rates it plainly thinks necessary to dampen the consumer boom and rein in the tearaway housing market. The business recovery is still incredibly fragile too. Companies need dearer money like a hole in the head right now.

The situation here in the UK is repeated in much larger form in the US, where the Fed may also have to raise interest rates to deal with inflationary pressures before the business recovery is properly established. Small wonder the stock market is so worried about it all. And no wonder too that policy makers are all at sea. For the time being the MPC should do nothing at all. Better that the housing market should continue to soar than that the Bank of England should plunge us all into recession.

EdF/Seeboard

The French may be out of the World Cup, but they demonstrated once again yesterday that when it comes to paying top dollar for a UK utility, they are hard to beat. The £1.5bn that Electricité de France has forked out for Seeboard works out at £309 per customer. That is comfortably more than even the deep-pocketed E.On and RWE of Germany paid for Powergen and Npower respectively.

On standard measures, it is also about 10 times more than EdF would have had to pay for Seeboard's 1.9 million customers had it been able to grow its existing UK business by that amount organically. There again, who needs to go around in the rain knocking on doors to sign up domestic customers when the French taxpayer is happy to foot the bill?

EdF says that with Seeboard now tucked safely under its belt, its spending spree in the UK has come to an end. It now owns three electricity supply companies, a couple of distribution businesses and 5,000 megawatts of generating capacity on this side of the Channel, giving it enough critical mass to co-exist alongside the other big boys in the energy market like Centrica.

What EdF does not say is that it has built its commanding position in the UK market in a way that would not have been remotely possible for a UK company wanting to do the same thing on French soil. The French energy market continues to be closed to outsiders in a way which makes a mockery of European Union liberalisation moves. The new centre-right government of President Chirac ought to be embarrassed by the Fortress France policy the nation employs, but in truth it seems to owe more to France's Gaulist traditions than the philosophy of open markets.

We are promised that one day the French will roll up the shutters. We are also promised that EdF will one day be part-privatised – though not in a way which will result in the state relaxing its iron grip over the company. Theoretically, then, non-French energy groups will eventually be allowed to enter the market. Unfortunately, it will all be too late for what remains of Britain's indigenously owned utilities industry. Most of it has been bought up by foreigners. The UK has only a few big utilities left and even these would think twice before tangling with the perfidious French. When even Kingfisher's bid to get its hands on a down at heel chain of out of town DIY sheds is elevated to the significance of another Waterloo, it does not bode well.

Pearson/FT Business

It's hard to know how Lord Stevenson of Coddenham fits it all in, what with combining the chairmanship of two FTSE 100 companies (Pearson and HBOS) with non-executive directorships of Manpower and St James's Place Capital, not to mention chairmanship of the Tate Gallery, membership of the House of Lords and the British Council as well as the Chancellorship of the London Institute. For all we know, he may be networking his way into yet more employment right now in his capacity as chairman of the Aldeburgh Festival (such a shame about the weather). When he finds time to play his violin is anyone's guess.

In between it all, he might care to have a long hard look at Pearson's planned sale of FT Business, the company's business magazines offshoot, publisher of the Investor's Chronicle among other titles. This is a comparatively small disposal by Pearson's standards but it highlights broader concerns. It was never entirely clear why Pearson would want to dispose of a business which seems strategically to fit pretty well with its mainstream business publishing activities. But then up pops one of its own employees, Stephen Hill, chief executive of FT Group, with a venture capital backed proposition, and the process was set in train.

Bizarrely Mr Hill remains technically employed by Pearson, so that if the bid fails he gets his old job back again. Pearson is meant to be an excellent employer but this surely does stretch the principle of corporate decency just a little too far. Anything Mr Hill has to contribute to FT Business he owes to Pearson's shareholders, not to himself and his venture capital backers. His position would be regarded as completely unacceptable in most organisations, especially since the whole idea of venture capital buyouts is to make piles of money at the seller's expense. Loyalty to employees is a fine thing, but Pearson is being taken for a ride. Someone needs to get a grip.

jeremy.warner@independent.co.uk