Until this time last year the rise in UK service sector prices was much the same as those of France and Germany (left-hand graph) But since then UK service prices have climbed steadily. The rise in sterling, which is holding down the prices of manufactured goods, does not help much on the services side.The rise in service sector inflation seems to have been associated with a surge in service sector demand. The best leading indicator of the pressure of demand in manufacturing is the purchasing managers index. Since last July the authorities have been collecting data for the service sector too and the first results were published a fortnight ago. The data is split into different categories but Goldman Sachs has calculated a single index from this and compared it with the manufacturing side (right-hand graph).

As you can see, since the beginning of this year there seems to have been a sudden spurt in services, while manufacturing has remained flat. This is further evidence that growth is shifting up a gear at the moment.So the figures are catching up with what is actually happening and the conclusion that interest rates will have to rise, maybe quite sharply, after the election is reinforced.But that is the short-term, market response Financial markets sleep, drink and eat interest rates. The wider issue, and it is one which we will hear much more of during the next five years, is whether our predominantly service economy can increase its output at a faster rate than in the past, and if so, how?Capacity is probably a more flexible concept in services than in manufacturing. The lags are certainly shorter, for the unit size of investments, and hence the lead time in getting investment into service, is shorter.

So it should be possible for service industries to respond to increased demand more easily than manufacturing. A rise in demand for services, too, is less likely to suck in imports, because a lot of services cannot be imported.That means that if there is increased demand which cannot be met by increased output, it has to show in higher prices rather than increased imports. During the late 1980s boom, soaring imports acted as a buffer, checking the rise in prices of domestic goods that would otherwise have taken place But that does not answer the capacity questions posed above There almost certainly is no simple, single answer. It is possible, though, to sketch some parts of a complex one. We know that, provided we approach capacity slowly, we are more likely to be able to stretch it.

A slow fall in unemployment is much less likely to lead to a sudden rise in pay rates than a rapid one.We know too that it takes quite a long time for increased investment in service industries to lead to increased productivity.One of the great puzzles of the past 10 years has been the tiny return that seems to have been generated by all the investment that companies have made in information technology. Part of the explanation may be that the investment has resulted in better quality of service and this is not caught in the output stats. But part of the explanation may simply be that it takes a while for new investment in any industry to improve productivity.Our economy is going through a very rapid structural change. Whole new industries are springing up, while existing ones are transforming their way of business. I think it is perfectly possible that we will see radical improvements in productivity of service industries, which will enable some increase in the "natural" rate of growth of the economy.But I doubt whether it is possible to do much to foster that growth, for that has to be a bottom-up, market-driven process.

The best thing the authorities can do is to provide a stable macro-economic environment which comes back to that next rise in interest rates.. Haruko Sugimura was a great stage and screen actress who gained world-wide fame in classic films by the masters of the Japanese cinematographic art - Akira Kurosawa, Yasujiro Ozu, Mizoguchi and Keisuke Kinoshita, among many others. She was also a "sacred monster" of the revitalised new Japanese stage in the style known as shingkei, strongly influenced by realistic European drama. Sugimura was born in Hiroshima, but her parents died when she was very small, and she was adopted by a building contractor who was a shareholder in the Kotobukiza Theatre in that city. Her adoptive mother was a theatre fan, and from an early age took her to watch performances of kabuki, bunraku (puppet theatre), shimpa (a new form of kabuki using both male and female players) and visiting western ballet and opera.