Inflation fears rekindled as dole queues hit 17-year low

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The Independent Online
With new figures showing earnings growth picking up as unemployment fell further, the Government issued a plea yesterday for pay restraint. The signs that the tight jobs market is fuelling wage inflation revived concern about interest rates. Diane Coyle, Economics Editor, reports on the Bank of England's dilemma.

The number of people out of work fell by 150,000 to 1.85 million between the summer and autumn, according to the quarterly survey of the labour force. The number of unemployment benefit claimants dropped by 28,700 in December to just over 1.4 million, the lowest for 17 years.

This 22nd decline running in the monthly claimant total was accompanied by figures showing the rise in underlying average earnings had climbed to 4.75 per cent in November, up from 4.5 per cent in October, itself revised up by a quarter point from the first estimate. The Office for National Statistics (ONS) said higher bonuses in both services and manufacturing and more overtime in manufacturing explained the rise.

Whatever the explanation, it alarmed the financial markets, where earlier hopes that the Bank of England might not raise interest rates again went into reverse. The minutes of the Monetary Policy Committee's (MPC) meeting in December, published yesterday, showed that the decision not to raise rates then was in order to "wait and see" because the economic evidence was mixed rather than reflecting a view that they had already climbed far enough.

Andrew Smith, Employment Minister, welcomed the drop in unemployment but warned: "Moderation on earnings is essential if economic growth is to be sustained and jobs growth to continue." He said it was essential to control costs in competitive world markets.

A background note to yesterday's figures issued by the Department for Education and Employment stressed that they were not conclusive evidence of inflationary pressure in the jobs market. In what could be interpreted as a message to the MPC, it said there were only a few signs of skills bottlenecks, and that the pace of decline in unemployment might have slowed recently.

David Blunkett, the Education and Employment Secretary, announced a new taskforce to tackle skills shortages, but said: "If we wish to avoid further pressure for retrenchment in the economy and concomitant interest rate rise, we must not exaggerate the problems."

However, yesterday's batch of statistics pointed firmly to a very upbeat jobs picture. The ONS said unemployment was falling, and employment rising, at a monthly pace of 20,000 to 45,000, more than its previous "over-cautious" estimate.

The fall in the quarterly labour force survey measure, seen as the most reliable indicator, was the biggest since the survey began in early 1984. The survey also showed a big rise in employment in the latest quarter, up by 117,000, almost all full-time jobs.

Full-time employment returned to its highest level in more than six years. Part-time employment, unchanged during the quarter, remained at a record level.

City commentators were more concerned about the upward creep in underlying average earnings. The November figure, based on an estimate of high bonuses in December as well, has matched the bonus-related spike seen last year.

However, if earnings growth did not retreat after another month or so, analysts said the Bank would have to raise interest rates. The balance of views in the City, which had tilted away from expecting an increase after signs of weakness in industry earlier in the week, tilted back the other way yesterday.

The minutes of the MPC's December meeting noted the members' sensitivity to accelerating pay. "Concerns about skill shortages persisted, and the [Bank's] Agents reported concerns around the country of emerging wage pressures."