CBI warns on service sector pay

SERVICE SECTOR pay is continuing to spiral upwards, according to the latest Confederation of British Industry survey out today.

The findings are likely to strengthen the hands of the hawks on the Bank of England's Monetary Policy Committee who believe that more pre-emptive rises in UK interest rates will be needed in the coming months to ensure that the Government's 2.5 per cent inflation target is not breached.

On Friday, Sushil Wadhwani, a dovish member of the Monetary Policy Committee, warned of growing wage pressures in the UK economy, suggesting that he believed that further interest-rate rises may be on the way.

The CBI survey shows pay settlements in the service sector continuing to rise in the three months to October, lending support to reports of skills shortages in key sectors of the economy fuelling inflationary pressures.

Service sector pay settlements were running at 3.6 per cent over the period, compared with 3.2 per cent in three-month period to September, although they were down from 4.4 per cent on the same period in 1998.

More than 10 per cent of service sector firms reported pay settlements of 7.5 per cent or more. Settlements in manufacturing industry, by contrast, are falling and over the same period slipped from 2.5 per cent to 2.4 per cent - a six-year low. But with manufacturing accounting for an ever slimmer slice of total economic activity, the fall is unlikely to count for much set against the strong rises in service sector pay.

The CBI's findings for manufacturing also contrast with the Government's official data, which showed manufacturing earnings rising since the summer.

Kate Barker, the CBI's chief economic adviser, said: "These figures indicate that there is still a two-speed economy despite signs of a manufacturing revival. Although manufacturers' input costs are rising, they are still holding the line on pay. However, there are now indications - particularly in the financial and business services sector - that strong jobs growth is leading to greater pressure on pay.

"The competitive environment may mean that this results in slimmer margins rather than higher prices."

The survey showed that 38 per cent of services firms consulted said that a significant pressure pushing up pay was the need to recruit and retain labour.

The survey covers 1,500 private sector settlements affecting two million employees.