The finding that a growing proportion of pay deals are for 4 per cent or more will reinforce the evidence of a strong domestic recovery as the Bank of England's Monetary Policy Committee (MPC) meets this week.
Last month's meeting saw a narrow majority for no change in interest rates, but analysts are hedging their bets about this month's vote. It sees the arrival of Sushil Wadhwani as a new member in place of Sir Alan Budd.
Despite signs of a tight jobs market and recovery in some parts of the economy, the strong pound will weigh in favour of a rate cut. The Bank's Inflation Report last month signalled that the exchange rate could perhaps tip the balance, and its index has appreciated 2 per cent from 104 to 106.1 since then.
The white-collar manufacturing union MSF wrote at the weekend to five members of the MPC urging them to vote for a half-point rate cut. "The jobs of thousands of people in manufacturing depend on the votes of the five hawks on the MPC," said Roger Lyons, the union's general secretary and a vocal campaigner for lower rates.
The new IDS report says pay had been on a downward trend: "But our latest batch of settlement data indicates this downward trend has stalled."
Very few settlements are worth less than 2.5 per cent, even though headline inflation has been below this figure for most of the year. Most lie between this floor and 3.5 per cent, but the proportion worth 4 per cent or more has increased.
The fall in headline inflation to 1.6 per cent could yet contribute to a further decline in settlements, the authors conclude. Even so, hints of a turnaround in wage increases join other signals of strength in the domestic economy such as surging house prices and record employment levels.
In its quarterly report this morning, the Chartered Institute of Marketing (CIM) says there is a divided economy, with consumer services thriving and manufacturing exports in the doldrums.
Doug McWilliams, the CIM's economic adviser, spelt out the MPC's dilemma. He said: "A sharp upward movement in the pound's exchange rate against the euro would cause great harm to industry; and a sharp fall would undermine the inflation outlook."
IDS Report June 1999.
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