Inflation rise fuels fears over pay claims

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TAX increases announced by Gordon Brown in his first two Budgets took inflation to a six-year high last month, triggering alarm that higher pay claims could derail the Government's economic policies.

The Chancellor issued a stern warning that pay must stay under control. "I don't want another bout of wage inflation in the UK and I think everyone has responsibilities in this respect," he said, after a meeting of finance ministers in Luxembourg.

However, the tax-related jump in headline retail price inflation to 4 per cent last month, along with the announcement of an inflation-busting pay award of up to 5.25 per cent for 90,000 Marks and Spencer staff, had already prompted demands for higher pay from public sector workers. Their anger was voiced by Rodney Bickerstaffe, general secretary of their union, Unison, with a warning that the public sector was falling further behind the private sector.

There was fresh fuel for his anger in separate figures suggesting the government's finances might be in surplus this year, a year earlier than the Chancellor predicted. The improvement is due partly to falling public expenditure in real terms, a squeeze which is likely to put Mr Brown under intense pressure in the current spending review.

More than a million public sector workers had their pay pegged to an average 2.7 per cent in January, after the Cabinet decided to pay the rises recommended by the review bodies in two stages. Ministers are now certain to face demands for a higher settlement in next year's pay round.

All public sector staff, including nurses, were held to two per cent in April with the remainder to be paid in December. Mr Bickerstaffe warned inflation could lead to a "push" in pay demands in the private sector widening the gap with the public sector.

Recent official figures showed the gap already yawning, with earnings growth up to 5.6 per cent in the private sector in a shock increase, but stuck at 2.6 per cent in the public sector.

"It will make people who work in the public sector even more unhappy, more likely to leave or it will make it difficult to recruit people," Mr Bickerstaffe said. "The Prime Minister said it's the start of the giving age. Whatever the rate of inflation, let's give a fair rate to public sector workers."

Any sign of new pay pressures would alarm City analysts already concerned that the Bank of England might have to raise interest rates again if earnings take off. "The financial markets will focus on how rebellious the public sector is likely to be," said Simon Briscoe at Nikko Europe, an investment bank.