Pay rises stoke inflation fears

Average private sector pay deals in the last three months rose to 4% annually, up from 3.5% earlier in 2007, according to Incomes Data Services (IDS).

On Thursday the Bank of England cut interest rates to 5.25%, but said it was still concerned that inflation was above its target rate of 2%.

The Bank has previously said that pay rises above 4.5% would be inflationary.

Pay rises had been expected to drop as the economy slowed, but new pay deals in transport and construction pushed the average up.

"The IDS survey reinforces belief that the Bank of England will continue to trim interest rates only gradually "
Howard Archer, Global Insight

"In spite of - or perhaps because of - the uncertain economic outlook, the upward pressure on private sector pay awards persists," Ken Mulkearn from IDS said.

Industry winners

Almost half of the pay settlements in the three months to January were for 4% or more. In the construction sector, deals were worth around 4.4% on average, the researchers found.

One of the highest pay awards was for some road haulage drivers in the West Midlands who received a 6.4% rise from January 2008.

The IDS looked at 77 pay deals involving 1.5 million workers, mainly in the private sector.

The latest government average earnings figures for both public and private sector workers showed pay excluding bonuses rising by 3.6% in the year to November 2007.

Bank's concerns

The Bank of England, which cut interest rates on Thursday to 5.25%, is concerned that rising household bills will lead workers to demand higher wages.

In its statement, the Bank's Monetary Policy Committee said:

"Inflation at 2.1% in December was close to the 2% target, but higher energy and food prices are expected to raise inflation, possibly quite sharply, in the coming months."

Some economists believe the growing pay pressures limit the scope of the Bank of England to cut interest rates further this year.

"The IDS survey reinforces belief that the Bank of England will continue to trim interest rates only gradually in the near term at least, barring a sudden very sharp collapse in UK economic activity," said economist Howard Archer from Global Insight.

Public-private gap

Incomes Data Services highlighted the extent of the gap between pay rises awarded to private sector workers and those working for the public sector.

Police officers in England, Wales and Northern Ireland, for example, recently protested against the governments' staging of their 2.5% pay offer, which they believe is effectively meant a 1.9% increase, below the rate of inflation.

RELATED INTERNET LINKS
Incomes Data Services
The BBC is not responsible for the content of external internet sites