Rising pay deals threaten inflation forecasts

The level of pay awards is rising across the economy, according to a survey published today that will heighten fears that the tight labour market is feeding through into wage inflation.

The level of pay awards is rising across the economy, according to a survey published today that will heighten fears that the tight labour market is feeding through into wage inflation.

Wage settlements for both services and manufacturing companies increased over the second quarter of the year, the Confederation of British Industry said.

The CBI found that the level of manufacturing pay deals rose to 2.9 per cent in the three months to June. This is the highest level since December 1998, and it compares with 2.5 per cent in the previous quarter and 2.7 per cent a year ago.

Services sector wage inflation ticked up to 3.8 per cent, from 3.4 per cent in the first quarter and 3.5 per cent in June last year.

Kate Barker, the CBI's chief economist, said: "Pay awards among manufacturing firms are picking up in response to rises in the cost of living, while in some services firms, skill shortages and the need to keep key staff have been the main driving force behind higher settlements."

Almost four in 10 services companies cited the need to recruit and retain staff as the main reason for hiking their pay awards.

However, Ms Barker said that the rise should not pose a threat to the Government's inflation target. "Firms are still facing strong competitive pressure," she said.

A separate survey, from the independent pay analysts IRS, showed that pay awards averaged 3 per cent in the three months to July, the same as in June but up from 2.5 per cent in March.

But IRS warned that rising inflation - which is now at 3.3 per cent compared with 1.1 per cent in September last year - would trigger higher awards in future. "There is a distinct possibility that settlement levels will rise above the 3 per cent mark in the months ahead," IRS said.

Unemployment is now at a 20-year low, while the number of people in work is at an all-time high. In parts of south-east England there is full employment, with anecdotal evidence of severe skills shortages.

But official data on earnings levels have shown a marked slowdown in annual wage inflation, from 6 per cent in February to 4.1 per cent in June, mainly due to falling levels of bonus payments.

The Bank of England said earlier this month that increased pressures on pay were a key threat to its forecast for inflation.