Inflation surge could lead to unsustainable pay settlements

The surge in the cost of living “has come at the worst possible time” and could lead to unsustainable pay settlements, the CIPD has warned.

Figures released by the Office of National Statistics yesterday showed the Retail Prices Index (RPI) shot up to 3.7% in the year to January compared to 2.4% in the year to December, while the Consumer Prices Index (CPI) rose by 0.6% in December to 3.5% in the year to January.

Most employers focus on the CPI to set their pay awards, but the Chartered Institute of Personnel and Development (CIPD) warned eight in 10 employers also use the RPI as their key cost of living benchmark, so its sharp rise last month could lead to increased pay settlements.

John Philpott, chief economic adviser at the CIPD, said while employers could be tempted to increase wages in line with the RPI, both the CPI and RPI would “almost certainly” drop later in the year and a squeeze on pay was necessary now to limit future job cuts.

He said: “With the late winter and early spring still an important period for pay bargaining, the surge in RPI inflation has come at the worst possible time.

“There is a risk that higher inflation will trigger bigger wage rises than the UK’s ailing economy can currently afford, even though the rise in both CPI and RPI inflation is a temporary spike, that will almost certainly be followed by an equally sharp fall later in the year.

“While it may not be comforting news for already hard-pressed workers facing a rise in their cost of living, real wages will have to be squeezed if jobs are to be preserved and any further rise in unemployment minimised.”

The median basic pay award was 1.2% in the three months to 31 December 2009, a survey by IRS for XpertHR revealed.

Analysis of pay trends by IRS can be found on the XpertHR website.

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