Pay deals still focus on RPI as new measure is ignored

Government efforts to focus attention on its new inflation measure have failed as employers and unions are still using the higher retail price index to set pay deals, a report shows today.

Government efforts to focus attention on its new inflation measure have failed as employers and unions are still using the higher retail price index to set pay deals, a report shows today.

Virtually all of the managers and union negotiators surveyed said they were using the headline RPI measure, which is running at a four-year high of 3.3 per cent, rather than the new consumer price index (CPI), which is now 1.2 per cent.

Incomes Data Services, the labour market analysts, said pay bargainers had accepted that mortgage and other housing costs, which do not feature in the calculation of CPI, are part of the rising cost of living and cannot be ignored.

Alastair Hatchett, the head of pay services at IDS, said their research showed that more than 99 per cent of negotiators had stuck with the RPI figure.

"It would be a foolhardy reward manager who tried to defend the CPI in pay negotiations arguing that it is a better measure because it excludes such irritants as mortgage payments, council tax and building insurance," he said.

Last year Gordon Brown moved the Bank of England's inflation target from 2.5 per cent under RPIX - RPI excluding mortgage payments - to CPI at 2.0 per cent.

He has repeatedly said he wants pay negotiators to use CPI when settling claims. "But there seems little appetite for this slender measure," Mr Hatchett said. "It would be interesting to hear the Chancellor making the case to his own workforce at the Treasury."

The Treasury has not concluded its pay negotiations for the coming year but the FDA, the senior civil servants' union, said the Government was trying to suppress pay rises across the public sector.

Dave Penman, the FDA's head of operations, said the Treasury's guidance for Whitehall departments was to keep their total pay bill increase in line with average earnings growth of 3.5 per cent. "There are tensions within the civil service," he said. "This is a blunt instrument to bring down public sector pay as it's not a level playing field. Civil servants end up being hit by the need to pay more to nurses and teachers," he said.

This disparity between the two rates of inflation is likely to worsen over the coming months. A survey of City banks found that on average economists expect RPI to break through 3.5 per cent and stay above it through to the summer. In contrast they forecast that CPI, which is likely to average 1.4 per cent this year, would reach only 1.8 per cent in 2005.

The key difference between the two is the cost of housing which makes up one-fifth of the RPI and which has surged almost 12 per cent over the year to September.

Mr Hatchett said previous Chancellors over the past 20 years had unsuccessfully tried to detach pay deals from headline inflation towards other measures such as the tax and prices index, RPIX, a European measure known as HICP and now CPI.