Pay deals and recruitment problems add to pressure for rate rise

A double whammy of rising inflation and recruitment difficulties means the new year pay round could still trigger more interest rate rises from the Bank of England, the Chartered Institute of Personnel and Development (CIPD) has warned.

It said that while the majority of employers expect to award staff pay rises of less than 3.5 per cent, at least one in five is putting off the decision until it has a clearer idea of where inflation is heading. The tight labour market and a lack of quality available staff could also exert an upward pressure on pay. Some 46 per cent of employers expect to struggle to find suitable recruits.

John Philpott, the chief economist at the CIPD, said: "Aside from the commonly observed tendency for some pay settlements to track the retail price index seemingly regardless of the balance of supply and demand, a growing proportion of employers report difficulty in finding recruits with the attributes they are looking for. While our survey overall still suggests that the winter pay round will prove benign for interest rates and jobs, we are as yet far from being able to breath a sigh of relief."

The survey shows that 58 per cent of employers are planning pay deals of less than 3.5 per cent, but Dr Philpott said he thought the final figure would be closer to 4 per cent.

The Bank of England's Monetary Policy Committee is on red alert for signs that the rising cost of living is leading to higher pay demands, threatening a wage-price spiral.

A separate report revealed that rising wage pressures and a shortage of raw materials drove up firms' input costs in January. The Royal Bank of Scotland regional purchasing managers' index showed inflationary pressures building across the board. Andrew McLaughlin, RBS group chief economist, said: "This point will not have been lost on the MPC, which seems to regard faster wage inflation as public enemy number one."