Big pay demands likely with 4 per cent inflation forecast

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The Independent Online

Companies face hefty pay demands in the new year when inflation is forecast to hit 4 per cent, an independent think-tank warned today.

Incomes Data Services said it expected private sector pay rises of between 3 and 4.5 per cent, going up to 5.9 per cent in the lowest-paid sectors affected by the national minimum wage.

In an analysis of pay trends next year, it said rising inflation would provide the background for the two most important months in private sector pay bargaining - January and April.

"The RPI inflation measure is the key to pay setting in the private sector," Ken Mulkearn, the editor of IDS Pay Report, said. "Inflation close to 4 per cent will be a very strong upward pressure on the level of pay settlements."

Headline inflation is expected to hit 4 per cent between December 2006 and February 2007, according to a survey of City economists by IDS. "Based on previous experience, this will set a benchmark for private sector pay settlements," it said.

The strongest upward effect on inflation has come from higher domestic fuel bills which have cut into employees' disposable income, and this is likely to form a key component of wage claims.

It said high housing and other living costs in London and the South-east have meant that many large employers had increased their premiums for staff in the capital over the past few years.

Its warning came as a separate survey showed that average household disposable wealth had fallen back below the £40,000 threshold. Households' available funds dipped down to £39,759, the analysts KDB said.

The main factors behind the fall were price falls on stock market, and the failure of house prices to keep pace with homeowners' appetite for new mortgage debt, it said.

Meanwhile, IDS warned that public sector workers were set to suffer a real- terms pay cut, as the Treasury's squeeze on pay bills starts to bite.

"Treasury policy for public sector pay rises in the next 12 months is for rises of no more than 2 per cent," IDS said. "Public sector pay settlements are likely to be lower under the impact of a much tighter Government pay policy."