January pay deals break through 4 per cent barrier

The first pay deals of the new year have breached the crucial 4 per cent barrier, according to a report today that will fuel fears at the Bank of England over an inflationary wage bargaining round.

Incomes Data Services, a labour market think-tank, said the average settlement had jumped from 3 to 4 per cent between December and January.

It is the first evidence that inflation, which hit an eight-year high of 3.9 per cent on the RPI cost of living index, is fuelling higher pay claims.

The strength of the labour market will be high on the agenda at the Bank as it starts work on its quarterly economic forecasts published next month.

Although its Monetary Policy Committee is certain to leave the base rate unchanged at 5.0 per cent this Thursday fears of an inflation-chasing wage round could force their hand in February. The inflation rate that the Bank targets, CPI, is running way above its 2.0 per cent at 2.7 per cent and could go above 3.0 per cent and force the Bank's Governor, Mervyn King, to write an open letter to the Chancellor, the Gordon Brown.

IDS said the first nine settlements of the new year were for an average of 4 per cent. They included 5.0 per cent at the electrical contracting industry, 4.22 per cent at Pfizer and 4 per cent at Airbus.

Ken Mulkearn, editor of the IDS pay report, said: "In the face of rising inflation, employees are likely to demand higher basic pay increases in order to maintain their purchasing power."

He said that two-thirds of all pay reviews took place between January and April, a period that City economists believe will feature 4 per cent-plus inflation.

"With RPI inflation near 4 per cent a long-format inflation mentality may be creeping back," said Michael Saunders, an economist at Citigroup, who expects a February rate rise.

But Phil Shaw, the chief UK economist at Investec, said hard evidence on the new year pay round from the Office for National Statistics would not be available until mid-March.

"In reality, we expect early indications to be insufficient to provide the MPC with definitive evidence on whether wages are proving an inflationary threat by next month," he said.

The British Chambers of Commerce urged the MPC yesterday to refrain from increasing rates until the trends in labour costs become clearer.

A separate survey highlighted worries over the labour market, showing that demand for workers had a hit a one-year high over Christmas.

BDO Stoy Hayward, the business advisers, said increased demand was offsetting the downward pressure on wages from increased inward migration.

"Wage growth is being maintained and is forecast to rise this month with the latest pay settlement as employees push for large wage increases to counter higher inflation," said Chris Grove, a partner at the firm.