What if the hair shirt gets itchy?

hotel for croissants, coffee and a chat . . . with John Major.

The Prime Minister, en route back to London from a weekend stay as

guest of the Queen at Balmoral, left the gathering to take an urgent

phone call, then came back and broke the news, on condition that no-one

left the room (or phoned their broker, presumably) until the rest of the

world had been informed.

The really intriguing question is how much advance warning of the

rates rise, if any, Mr Major himself had had. After all, surprise was

the key ingredient. The timing left an awful lot of other people,

including some of the Chancellor's own panel of wise men,

comprehensively wrong-footed.

Before Monday, the prevailing consensus was that a rates rise was on

the cards, but that slackening consumer demand over recent months would

ensure it did not come into effect just yet. That was the very point

made by the CBI's Howard Davies at last Thursday's CBI Scotland dinner.

Davies argued that, while April's tax increases had begun to affect

retail sales, the recovery was becoming more marked in production,

investment, and exports. ''So a modest slowdown on the high street is no

cause for concern,'' he continued. ''Indeed, I hope the main effect is

to persuade Eddie George that he can hold off his interest rate rise for

some time yet.''

Sorry Howard. Fast Eddie had already persuaded Canny Ken of the

virtues of a pre-emptive strike against future inflationary pressures.

If only Michael Heseltine had stuck to what he was billed to say last

Thursday, we might all have had a clue that the deed was as good as

done.

This is what the President of the Board of Trade, who chucked away his

prepared text, didn't actually say: ''Of course we will not continue to

enjoy these favourable circumstances (non-inflationary growth) unless

both the Government and industry keep a grip on inflation. The

Government is determined to do what is necessary to achieve this. You

should not doubt our resolve to take tough decisions and stick by

them.''

That resolve -- demonstrated weeks before a potentially-fretful Tory

Party conference, right in the middle of the Blair honeymoon, when

underlying inflation was at a 27-year low and the Government was

trailing by even more points in the polls -- went down well with the

City, at first.

Almost two years to the day after the UK's shambolic exit from the

ERM, when ministers were exposed ignominiously making up policy on the

hoof, here was a government -- or rather a Chancellor -- seemingly

prepared to play the long game for the right reasons, regardless of

short-term unpopularity.

Mr Clarke followed up the move on base rates with an explicit warning

of no tax cuts this November (whatever the Tory right wing might have to

say on the issue) and threats of a continued tough line on public sector

pay. Canny Ken? This, surely, was a chancellor swopping suede shoes for

hair shirt, frothing pint for bumper bromide.

Yesterday's news of an unexpected O.1% rise in both headline and

underlying inflation in August took some of the shine off Mr Clarke's

seemingly high-minded stance. When placed side-by-side with Monday's

producer price data, yesterday's RPI figures suggest inflationary

pressures were already troubling Treasury and Bank of England officials

when the half-point rise was sanctioned. Equity markets responded

accordingly, with share prices dipping sharply lower.

Far from acting well in advance of future inflationary pressures, it

begins to look as if the Chancellor was yet again lunging for the brake

after the lights had turned to amber. Given his renowned political

skills, Mr Clarke may well find ways of clinging on to the enhanced

credibility which the markets initially accorded the move on rates.

But, in the longer term, can he resist the electoral and party

pressures which are bound to build up if this interest rate rise -- and

others that may well now follow it -- snuffs out any real recovery in

domestic consumption? If too many of us are still feeling far from good

six months or a year from now, that hair shirt could begin to feel very

itchy indeed.

No-one I talked to at the CBI dinner mentioned interest rates. But an

awful lot of those I encountered were talking about insecurity. When

leading accountancy firms are dispensing with partners and

multinationals are delayering senior management, job insecurity becomes

a middle-class obsession too. They say the number of footloose executive

cvs fluttering from office to office in search of something meaningful

to do has reached unprecedented levels.

Anything which exacerbates that sense of insecurity -- and higher

mortgage payments, an even more sluggish housing market, and dearer

borrowing costs for school fees come into that category -- chips away at

the Tory Party's already fragile support in its heartland areas. But

this prevailing sense of insecurity spreads far beyond the question of

will I or won't I have a job tomorrow.

Mr Clarke says his objective is to deliver the British economy into an

era of permanently low inflation, where sustainable growth becomes

possible. That way, he argues, lies the opportunity to raise genuine

living standards and create real new jobs. Sounds commendable. The

trouble is that getting there, and getting used to the new surroundings,

is an deeply unsettling and painful experience.

Low inflation means stable prices. Since the recession began to bite,

companies have been finding it harder and harder to make price increases

stick, even where these are justified by soaring raw material prices.

This week I talked to some executives in the paper industry who have

been hit by pulp price increases of up to 50% and more so far this year.

Passing even a proportion of these rises on to customers is proving a

major management headache.

The point was reinforced on Monday by Cameron McLatchie, chairman of

British Polythene Industries. He announced an average 15% price rise in

BPI's product prices in the wake of 25% hikes in polymer prices in

August, with a further 10% rise threatened for October.

I asked my companions why some raw material prices were spiralling

upwards in this way. They offered two explanations. The impact of

capacity reductions during the recession as demand picks up again. And

the inexhaustible appetite for such materials in the Pacific Basin,

particularly in booming China.

If more and more of our companies find it harder and harder to make

price increases stick -- and Mr Clarke's permanently low inflation

future is telling them that's the new reality -- how will they grow

profitability in their businesses. They will -- surprise, surprise --

have to look even more closely at costs and productivity.

But bearing down even more single-mindedly on costs means generating

even more of a sense of insecurity among workforces up and down the

land. Reinforce that sense of insecurity with a rising trend in real

interest rates and the prospects of rediscovering the feel-good factor

this side of the next election look even more remote.

On this analysis Mr Clarke is running with some very big political

risks. Even if the exporting side of the economy continues to grow

lustily -- thanks in part to the pound's devaluation since Black

Wednesday -- large sections of the population are going to go on feeling

insecure and resentful of interest rate rises and the downward pressure

on pay.

The longer he sticks by his line of ''no tax cuts before the deficit

is cracked'', the more the political discontent within his own party

will grow. If he pulls a few rabbits out the hat just before breaking

point is reached and, coincidentally, just before we go again to the

polls, he might find the electorate has become too cynical to swallow

the hook.