Wage growth sends out inflation warning signal

Wage growth hit its highest level for more than two years over the autumn as the number of people in work climbed to an all-time high, official figures showed yesterday.

Wage growth hit its highest level for more than two years over the autumn as the number of people in work climbed to an all-time high, official figures showed yesterday.

Both measures of unemployment fell according to a strong set of labour market data that analysts said would send a warning signal to the Bank of England over inflation pressures. Ross Walker, at Royal Bank of Scotland, said: "Higher pay settlements in the new year are likely and we wouldn't bet against a further rise in base rates in 2005."

Average earnings excluding bonuses rose at an annual rate of 4.4 per cent in the three months to October, the fastest pace since March 2002. The headline rate rose to a four-month high of 4.1 per cent from 3.8 per cent in September, thanks to large bonuses in the financial services sector.

Underlying wage inflation had climbed slowly from 3.6 per cent in the summer of 2003, close to the 4.5 per cent level that the Bank sees as the maximum compatible with its inflation target.

The number of people out of work and claiming benefit rose by 3,400 to 833,200 last month, more than reversing the small rises in September and October. The claimant count rate at 2.7 per cent is at a three-decade low.

The more comprehensive ILO unemployment measure fell by 29,000 in the three months to October to 1.39 million. Employment rose by 55,000 to a record high of 28.44 million.

Meanwhile the number of vacancies rose by 3,600 to 644,300, echoing private surveys pointing to robust demand for staff in the new year.

"The labour market remains very strong and, indeed, is still tightening," Richard Jeffrey, at Bridgewell Securities, said. He added that a revival in public sector pay, which jumped from 4.2 to 4.6 per cent, showed that Whitehall job creation was making it harder for companies to compete for the available staff.

John Philpott, at the Chartered Institute of Personnel and Development, urged wage bargainers to be "sensible" when seeking pay deals. He said: "The Bank may have to act to cool the labour market in the knowledge that a rate increase for this reason could have serious destabilising effects on other parts of the economy."

But other analysts said that the latest rise in wages was driven by one-off factors and did little to alter the picture of an economy with few inflationary pressures.

Nick Stamenkovic, an economist at the bond traders RIA, in Edinburgh, said: "Talk of a rate rise is premature. There is no sense of an inflationary pick-up and I don't think the Bank will overreact."