Inflation rate willl put pressure on employers to boost wages

Employers are likely to face increasing pressure to raise pay after inflation hit a 19-year high in April, according to employment experts.

Inflation as measured by the Retail Prices Index – widely accepted as the truest measure of the cost of living because it includes housing costs – jumped from 4.4% in March to 5.3% in April, its highest rate since 1991.

The rise in the cost of living, fuelled by higher bills, more expensive food and drink, rising mortgage rates and the restoration of VAT to 17.5%, has come against a backdrop of widespread pay freezes and low pay increases.

Employers will be forced to address the issue if inflation remains at these levels, warned Nigel Meager, director of the Institute of Employment Studies.

“The labour market faces a double whammy,” he told Personnel Today. “Employers will be under real and growing pressure from disgruntled staff to respond with similar wage increases, and the Bank of England will need to raise interest rates, endangering the somewhat precarious economic recovery.”

Ian Brinkley, knowledge economy programme director at The Work Foundation, agreed there will be “some upward pressure” on pay packets, but added that growth is “more likely to come from recoveries in bonus payments and stronger demand for labour”.

There is some anecdotal evidence that employers are starting to move away from widespread pay freezes, with the Bank of England this week revealing its regular conversations with businesses had shown “tentative” signs that pay rises could come back. But XpertHR analysis of April 2010 pay deals from IRS – released next Friday (28 May) – is expected to show that private sector pay awards remain low.

The public sector, meanwhile, continues to face calls for pay restraint despite the growth in inflation, with the CBI urging the government to impose an immediate two-year pay freeze to get the £163bn budget deficit under control.

Beth Lamont, head of pay at the Public and Commercial Services union, hit out at the CBI. “Since 2007, inflation has been almost double the increase in basic pay in the Civil Service, so we were already starting from a low base,” she told Personnel Today.

“When the average civil servant is paid £22,850, compared to a national average in the private sector of almost £25,000, a pay freeze as called for by the CBI would be disastrous not only for our members’ livelihoods but also for the economy.”

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