Pay deals pave way for rate cut

New evidence that inflation-busting pay deals such as those at Ford and Vauxhall are the exception rather than the rule will clear the way for Chancellor Kenneth Clarke to cut interest rates as expected early next month. Pay settlements have levelled off according to industry surveys, easing concerns that higher wages could fuel inflation.

However, harmonised inflation figures due to be published by the EU Commission on Thursday could come as an unpleasant irritant to the Chancellor. The figures will show British inflation measured on the same basis as other countries to be higher than the headline rate.

The Engineering Employers' Federation reports in its Pay Bulletin today that settlements in January averaged 3.4 per cent, the same as the average rise in December.

David Yeandle, head of employment affairs for the EEF, said: "Engineering pay settlements in the key month of January show fears of a pay and prices spiral in 1996 are not justified by events." The trend in pay had been flat since late summer, he said. This followed a gradual increase in 1994 and earlier last year.

There were 275 agreements reported so far in January, which accounts for nearly a third of annual settlements. Just over half involved awards of between 3 and 4 per cent.

The engineering figures followed a report that nearly two-thirds of the 160 private sector deals monitored so far this year by independent pay analysts Incomes Data Services lay between 3 and 4 per cent. This was similar to December's pattern of settlements.

The IDS report sounded a note of caution about cost pressures. It said few pay deals were lower than 3 per cent. Retail price inflation fell to 2.9 per cent last month, meaning that almost all the deals were ahead of inflation.

The Governor of the Bank of England, Eddie George, expressed concern about pay deals around the turn of the year. But the Bank's recent Inflation Report was optimistic, saying lower inflation in the coming months might help ease pay pressures.

European Commission calculations of retail prices on a consistent basis for all member countries, due on Thursday, form a small cloud on the inflation horizon. Economists at investment bank Kleinwort Benson predicted the figures would come as an unpleasant surprise to financial markets.

The EU measures exclude components such as housing and insurance where national definitions of the retail price index vary widely. They are expected to show British inflation of 3.2 per cent in January compared with the headline figure of 2.8 per cent for the Government's target inflation measure, as insurance costs have fallen sharply in Britain during the past 12 months. By contrast, Germany's "harmonised" inflation is likely to be lower than its published rate, at 1.3 per cent rather than 1.5 per cent.