Pay rises and fall in jobless spark fears over inflation

PAY AWARDS and bonuses surged above the Bank of England's pain threshold while unemployment tumbled to its lowest level on record last month. Figures out yesterday, which brought a host of new records, appeared to justify last week's unpopular interest rate hike.

The rate of unemployment fell sharply over the last quarter from 6.2 per cent to 5.9 per cent, the lowest rate since the ILO measure began in 1984. The number out of work and claiming benefit fell by 22,300, twice the 10,000 forecast in the City, to 1,211 million - the lowest since April 1980 when it was 1.185 million.

The claimant rate also fell to a new 19-year low, hitting 4.2 per cent and putting it in sight of rates of 3.9 per cent not seen since Harold Wilson's Labour administration of 1974. The number of people in work hit a fresh all-time high, with an extra 54,000 flowing into the workforce taking the total to 27.412 million, or 74 per cent.

The headline quarterly rate of growth in average earnings rose to 4.6 per cent in July from 4.4 per cent and above the 4.5 per cent figure seen by the Bank as the highest level consistent non-inflationary growth. The market took comfort from a fall in the monthly figure to 4.4 per cent from 5.2 per cent.

Ciaran Barr, an economist at Deutsche Bank, warned millennium bonuses could drive earnings back over 5 per cent later in the year. "Against this background, the bank's rate rise looks a sensible pre-emptive move. We expect another 0.25 per cent in November," he said.

The Government hailed the figures as a vindication of its job creation initiatives. Andrew Smith, the Employment Minister, said: "I am confident we can build on our record even further to help all those people with the potential to take up a job."

Significantly, he did not repeat the commitment to full employment given by David Blunkett, the Secretary of State for Education, last month, reverting to Labour's preferred phrase of "high and stable employment".

Economists questioned how much far employment and wages could rise without triggering inflationary pressures. Martin Taylor, of Lombard Street Research, said: "As the economy keeps growing, so the number of suitable workers is going to run out."

The jobs bonanza was not shared equally, with the manufacturing sector employment falling below 4 million. The sector axed 154,000, or 3.7 per cent of the workforce, over the last year, with employment in textiles and leather tumbling almost 12 per cent.

The Confederation of British Industry said it was concerned about "mounting evidence of a two-speed economy". The CBI's economist Kate Barker said: "We are seeing continuing job losses among manufacturers as strong sterling keeps exporters under pressure." The manufacturing union MSF blamed the Bank for the recent job losses.

Gordon Brown, the Chancellor, will today defend the Bank, describing the rate hike as "resolute and pro-active". "Far from choking off recovery, pre-emptive action is essential in order both to sustain growth and meet our inflation target," he will say.

He will indicate growth this year is likely to be at the top of the 1 to 1.5 per cent range published in the Budget but will signal there is to be no change in public spending plans.

Michael Fallon, a Tory MP, yesterday called for the Governor of the Bank, Eddie George, to be called before the Commons Treasury select committee to explain the "rationale of the unexpected increase".