Persistent inflation casts shadow over pay deal prospects

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The Independent Online

Rising inflation is set to fuel pay claims by private sector workers and make it more difficult for the Government to keep the lid on state sector pay, a labour market think-tank warned today.

The headline rate of inflation hit 3 per cent in May and is forecast to stay above that level in the run-up to the next wage bargaining round in the new year, Incomes Data Services (IDS) said.

The average pay settlement over the three months to June came in at 3 per cent, although most of the deals were reached against the background of inflation at 2.4 per cent.

Sarah Miller, editor of the IDS Pay Report, said that this inflation rate, known as the retail price index (RPI), was the "starting point" for private sector pay talks. "The recent pay increase of 3 per cent reflected inflation at around 2.5 per cent," she said. "With inflation set to be at 3 per cent for the rest of the year, the median pay increase in the private sector may well rise to 3.3 or 3.5 per cent in coming months."

She said the Government would find it "more difficult" to depress public sector pay settlements to the level of 2.25 per cent that Gordon Brown recently announced.

Ms Miller said that a number of recommended pay settlements had been referred to the Government's "gateway" committee that must now vet all significant public sector pay awards.

"As Civil Service pay rounds get under way, this year could see some protracted public sector pay bargaining," Ms Miller said.

Public sector pay deals are currently running just below 3 per cent, due to the large number of agreements made as part of a deal covering local government.

Inflation has been driven up by rises of as much as 25 per cent for gas and electricity bills, a 4 per cent increase in council tax and a general rise in the cost of goods made in both the UK and abroad.

This has driven households' inflation expectations up to record levels. An index devised by The Independent showed that inflation for non-discretionary items - which people tend to notice first - has been running above 4 per cent.

Official pay figures show that growth in average earnings in the private sector hit a 13-month high of 4.5 per cent in April, although that was influenced by City bonuses.

IDS said the biggest deal in the latest quarter was a 3.5 per cent award paid to 600,000 manual workers in the construction industry as part of a new three-year agreement.