Comment: inflation grief haunts Darling

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In last night's Mansion House Speech, delivered in a week when inflation hit its highest for 16 years, the Chancellor called on workers not to demand higher wages and lead Britain into a 1970s-style wage-price spiral. But pleas for restraint have limited clout, as the 1970s taught us. As Shell tanker drivers celebrate the 14 per cent pay rise won following their strike, and Unison, one of Britain's largest unions, prepares for a ballot on industrial action, Mr Darling should have done more last night to demonstrate his readiness to face down unions that can mobilise millions of public sector employees. There is a chance, however, that his exhortations will have an effect; the Government is hoping that labour markets are now so competitive that workers will fear making excessive pay claims.

For the Governor of the Bank of England, it was a better night. Unlike the Chancellor, Mervyn King's institution has a powerful monetary tool for tackling inflation, in the form of interest rates, and he did not hesitate to make it clear that the Monetary Policy Committee was prepared to raise the cost of money if necessary. It emerged during the evening that Deputy Governor Sir John Gieve, savaged by MPs over his role in the Northern Rock crisis, would be leaving two years early, but as Sir John was a relatively recent import from the Civil Service and will in all likelihood be replaced by career Bank man Paul Tucker, this is no reversal for Threadneedle Street.

As part of reforms aimed at boosting the Bank's grip over City markets, a new "financial stability committee" will be created, and chaired by Mr King. The Bank, not the Financial Services Authority will take responsibility for the new Special Resolution Regime for failing banks - but it is to lose six members from its governing "court".

Just how far the Bank has won the blame game over Northern Rock, versus the Treasury and the FSA, is not yet clear. But the new arrangements are in effect an admission that the post-1997 framework for banking supervision was not adequate to deal with the first run on a bank since the 19th century. While the PM will continue to deflect blame for inflation onto international factors, the announcement of new supervisory arrangements will re-open arguments over Northern Rock. That can only damage further his reputation for economic competence.