CBI sees pay rises falling back

Fears that the lowest unemployment for almost two decades will lead to higher interest rates by igniting inflation in the labour market will be countered today with the Confederation of British Industry saying that pay settlements are coming down in both the manufacturing and services sectors.

With the Bank of England divided over whether interest rates should go up to forestall a pick-up in inflation, the CBI says the evidence from its quarterly survey means it is too early to think of dearer borrowing.

Pay deals in manufacturing have averaged 2.7% in the three months to June, down from 2.9% in the previous quarter and 3.5% in the spring of 1998, the employers' organisation says. In the services sector - where firms have been more sheltered from tough international competition and the impact of the strong pound - settlements have been running higher than in factories, at 3.5% in the latest quarter. However, this is still down on the 3.6% in the first quarter of 1999 and 4.2% in the three months to June 1998.

Slower growth and a fall in the headline rate of inflation, the benchmark for most pay negotiations, have helped to keep settlements low, with fewer firms this year citing recruitment difficulties for raising wages and salaries despite the steady drop in the number of people out of work and claiming benefit to under 1.25m.

Kate Barker, the CBI's chief economist, said: "With unemployment falling, there are only limited signs of inflation pressure in the labour market. A slower pace of job growth, and manufacturing job cuts, are proving consistent with pay settlements declining in line with lower inflation. "With UK growth likely to be steady rather than spectacular over the next six months, these data support our view that talk of interest rate rises is premature."

Some City analysts believe that it is only a matter of time before the tightness in the labour market starts to force up wages, however, thereby putting at risk the government's 2.5% inflation target.

Jonathan Loynes, economist at HSBC, said other evidence sugested that real - adjusted for inflation - wages were running at their highest for eight years and that pressures were gradually building up.

"Although it is still early days, the failure of pay awards to respond to the current weakness of inflation is the clearest signal to date that the tightening of the labour market may have gone a step too far," he said.

However, the CBI pay databank, a survey of 1,500 private sector firms, found that more companies were making low pay awards as inflation fell.

In manufacturing, 29% of businesses reported settlements below 2.5%, compared to just 11% a year earlier. A further 47% said deals were running between 2.5% and 3.5% as against 47% in 1998.

Almost a half of manufacturers (45%) said that the inability to raise prices was keeping pay awards down this year, followed in importance by low profits (35%) and weak order books (25%).

Only 15%, down from 21% last year, said problems finding and keeping staff were putting upward pressure on settlements.

In the services sector, 21% of firms said that low profiits were the strongest downward pressure on pay deals, with 18% citing an inability to raise prices and 17% the fall in inflation.

While 40% of service sector firms said last year that the need to recruit and retain labour was a significant factor in pushing awards up, this year the figure was only 35%.