Rate rise fear as skill shortages push up pay

Skill shortages are beginning to force up wage settlements, fuelling fears that interest rates may have to rise again in the New Year to curb inflation.

The prospect of higher rates comes amid evidence that retailers have experienced a poorer than expected Christmas while some economists suggest that bargains in the January sales will be at record levels as shops try to offload unsold stock.

According to figures from the CBI Pay Databank published today, pay awards are now running at an average 3.4 per cent in manufacturing compared with 3 per cent a year ago and in the quarter to August.

In the service sector, deals were averaging 4.4 per cent in the three months to November, compared with 3.9 per cent in the quarters to last August and November 1996.

Around half of British manufacturers report that cost of living increases were an important upward pressure on settlements. One in five pointed to their need to recruit and retain employees - a sign partly of the shortage of information technology specialists.

Kate Barker, chief economist at the CBI, said that the figures would need to be monitored closely because of their potential impact on inflation, but argued that the Bank of England should not be "panicked" into putting up interest rates again.

There were indications that economic growth might be slowing down, so that the most important effect for manufacturers of increasing pay settlements would be lower profits rather than inflation. Increased pressure on margins could feed through into job losses, she warned.

Increasing levels of settlements in service industries largely reflected the buoyancy in the business services sector in a quiet part of the year for pay reviews.

Since August there had been a wide variation in awards, reflecting the different circumstances of individual service firms. Some 14 per cent of settlements were at or below 2.5 per cent; 35 per cent between 2.5 and 3.5 per cent; 21 per cent between 3.5 and 4.5 per cent; 17 per cent between 4.5 and 5.5 per cent and the remaining 13 per cent were above 5.5 per cent.