Pay demands may push up interest rates

Fears of big pay claims in the new year wage rounds were sparked yesterday by official figures showing that average earnings rose by more than expected in November.

The number of people claiming unemployment benefit also fell unexpectedly, painting the rosiest snapshot of the labour market in almost two years and shortening the odds of a third interest rate rise in six months.

The data will fuel concerns at the Bank of England about the risk of spiralling inflation given that retail price inflation, which is used by to set pay packets, hit an eight-year high of 3.9 per cent last month.

Average earnings including bonuses climbed by 4.1 per cent in the three months to October, up 0.2 per cent on the previous quarter. Excluding bonuses, average earnings were up by 3.8 per cent.

The increase comes at the end of the year in which the growing supply of immigrant workers has helped to keep a lid on wage growth. Government statisticians said the rise was largely driven by private sector services, although economists also noted that the national minimum wage increased by 20p per hour at the start of October to £5.35.

Howard Archer, UK economist at Global Insight, said: "There is a serious risk that wage settlements will move significantly higher in the 2007 pay rounds in reaction to [the] RPI inflation. If wages do move up significantly ... the Bank is highly likely to respond with another interest rate hike in the first quarter of the year."

But Stuart Bennett, at Calyon, said the annual rate of increase was still below the 4.5 per cent threshold that the Bank of England believes is compatible with hitting the inflation target.

The Office for National Statistics said the claimant count, which measures the number of people claiming unemployment benefit, dropped by 5,700 in November, its biggest fall since January 2005. The reading for October, which had shown a rise of 1,200, was revised to a decline of 3,600.

The official jobless measure, as calculated by the International Labour Organisation, fell by 7,000 in the three months to October to 1.695 million, taking the unemployment rate to 5.5 per cent. The number of people in employment over the same period edged 41,000 higher to 29 million.

Jim Murphy, the employment minister, said the figures showed "welfare reform in action". He added: "These figures paint an encouraging picture. The UK already has the highest employment rate in the G8, but we need to go further still."

However the figures showed a jump in the number of part-time jobs is behind the increase, which economists said may reflect a lack of confidence about the economy in 2007. Full-time employment fell by 93,000 in the three months to October.