Higher pay rise data fuels inflation fears

Average private-sector pay rises across the UK unexpectedly increased over the past quarter, with companies awarding their staff an average raise of 4 per cent during the three months to the end of January.

According to Incomes Data Services (IDS), more than half of pay deals settled over the last three months have been 4 per cent or above, compared with median rises of just 3.5 per cent in the final quarter of 2007.

Howard Archer, chief UK economist at Global Insight, said the data reinforced the view that the Bank of England would only continue to reduce interest rates slowly. "A major concern for the Bank of England is that a near-term marked spike up in inflation resulting from higher utility bills and elevated food prices could lift inflation expectations further and lead to higher wages, particularly given a currently relatively tight labour market," he said. "This would increase the risk of a damaging wage-price spiral developing, which is the last thing that the Bank of England wants to see."

The transport sector saw above average rises of 4.2 per cent over the quarter, while the construction industry awarded raises of 4.38 per cent. The highest increase was a 7 per cent pay rise, handed out by the Thermal Insulation Contracting National Joint Council to 6,000 workers.

"In spite of – or perhaps because of – the uncertain economic outlook, the upward pressure on private-sector pay awards persists," said Ken Mulkearn, editor of the IDS Pay Report. "Our initial look at January deals, a month ago, showed that the median had risen sharply to 4 per cent, against a backdrop of high inflation and continued strong economic performance in key sectors."

Public-sector pay rises have been much more modest over the past few months.

The consumer prices index – the Government's chief measure of inflation – stands at around 2.1 per cent. The retail price index, considered more realistic measure, is running at 4 per cent.