Pay deals have fallen but still beat rate of inflation

PAY DEALS have fallen in both manufacturing and services sectors but are still ahead of inflation, according to a survey today that highlights the dilemma the Bank of England faces over interest rates.

Wage settlements in the manufacturing sector averaged 2.7 per cent in the three months to June, the Confederation of British Industry said. This marked a fall from 2.9 per cent in the previous quarter but is still more than twice the rate of inflation.

Service sector wage deals have also fallen, to 3.5 per cent from 3.6 per cent previously and 4.2 per cent a year ago, but are almost three times higher than inflation. The survey showed more firms made low wage settlements over the past year, with 29 per cent of manufacturing firms cutting deals at 2.5 per cent or below compared with 11 per cent a year ago. Almost half the deals - 47 per cent - were between 2.5 and 3.5 per cent, 17 per cent were 3.5 to 4.5 per cent while the remaining 7 per cent were above 4.5 per cent, compared with 10 per cent last year.

Manufacturers said they were forced to keep wages down because the economic climate meant they were unable to pass price increases on to customers. Only a quarter said the cost of living had pushed up pay deals.

Kate Barker, the CBI's chief economic adviser, said there were "only limited signs" of inflation pressures in the labour market. "A slower pace of job growth, and manufacturing job cuts, are proving consistent with pay settlements declining in line with lower inflation," she said. "With UK growth likely to be steady rather than spectacular over the next six months, this data supports our view that talk of interest rate rises is premature."

The latest official figures showed average earnings rose to 4.4 per cent for the three months to June, compared with 4.3 per cent in May, confounding forecasts of a fall to 4.1 per cent. The services sector leapt to 4.6 per cent from 4.3 per cent, while manufacturing was unchanged at 3.4 per cent.

The CBI stressed its data was not directly comparable with the official figures as it only included bonuses if changes to the bonus scheme were an integral part of settlements.

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