Private sector wage deals spark fear of surge in pay

Fears of an inflation-busting new year wage round were fuelled yesterday by a survey showing a sharp rise in private sector pay deals last month.

The average level of annual pay deals rose to 3.4 per cent in October from 3.1 per cent in the previous month, Industrial Relations Service said yesterday. This pushes deals to the top of the range of the last decade.

Although the rise was influenced by October's 30p-an-hour rise in the national minimum wage, analysts said it could be the first sign that rising inflation was feeding through to pay claims.

Headline retail price inflation has risen from 2.2 per cent at the end of last year to an eight-year high of 3.7 per cent in October. It is expected to hit 4.0 per cent by the end of the year according to a consensus of City analysts.

There have been particularly sharp rises in key services that households have to pay for such as gas bills, up 41 per cent, and electricity tariffs, which have risen 27 per cent over the last year.

Howard Archer, chief UK economist at Global Insight, said: "The Bank of England is on red alert for any signs that pay is moving significantly higher. If pay does move markedly higher in the early 2007 wage settlements, the Bank is highly likely to respond by pushing interest rates higher."

Last week Mervyn King, the Bank's Governor, played down fears of a surge in pay deals, saying the fall in trade union membership had lessened the importance of collective bargaining.

"Clearly we have seen demand for labour pick up again, but we don't know how much the RPI will influence the outcome of wage bargaining. We will have to wait and see," he said.

Malcolm Barr, UK economist at JP Morgan, said the slack in the labour market thanks to continued net immigration would constrain wage growth. "Our view is that the early 2007 wage round will prove benign and the IRS data do not change that view," he said.

Meanwhile, the overall level of wage deals in the manufacturing sector edged up to 3 per cent for the first time in two years. But the number of companies freezing pay and deferring their pay settlement increased, the manufacturers' organisation EEF said.

The average level rose to 3 per cent last month, up from 2.8 per cent at the end of September. The number of companies reporting that they had frozen pay rose slightly, to just over 5 per cent.

David Yeandle, a deputy director of EEF, said: "We will have a clearer picture of the future direction of manufacturing pay settlements when the figures include settlements reached in January 2007, the main month for pay negotiations."