The big squeeze just got tighter

Homeowners hoping for another rate cut have been dealt a painful blow today by the Bank of England's latest inflation report. Prospects of a cut in June had already receded thanks to bad inflation figures earlier this week - but today's warnings from the Governor Mervyn King, of rising price levels in the coming months, take us into new territory.

Mr King pointed to evidence of weakness in economic activity, even as he spoke of the factors preventing the Bank from offering the stimulus of cheaper money. Commercial property prices are already down by 16 per cent since last summer. And as housing minister Caroline Flint inadvertently confirmed yesterday, the residential market is set to fall by between five and 10 per cent this year alone. Growth could be as low as one per cent by the end of this year, putting tax revenues and public finances under further strain.

Against this backdrop, the claims by the Chancellor this morning for his tax giveaway look implausible. The backbench row over the abolition of the 10p tax band had made compensation for the five million losers a political necessity ahead of the Crewe by-election. But raising tax thresholds simply by going further into the red is a risky remedy. Mr Darling has done his best to present his £120 raising of the tax threshold for more than 20 million people as a boost to the economy along the lines of the $600 cheques currently being sent to American taxpayers. Yet his giveaway is much smaller.

As Mr Brown presents his draft legislative programme today, the task of distracting attention from a toxic mix of rising inflation and falling growth suddenly looks much harder.