Wage inflation & interest rates
New research from Incomes Data Services (IDS) has found that public sector pay settlements were running at zero in the three months to April 2011.
The median pay settlement in the private sector increased by 3% in the three months to March, up from 2.5% in the previous three month period.
These figures are important because they demonstrate that stubbornly high price inflation is not finding its way into wage demands.
Should this start to happen, the Bank of England would have little choice but to hike up interest rates, in an attempt to prevent high inflation becoming persistent.
Wage inflation is unlikely to become apparent in the public sector this year or next.
It would be difficult to justify pay rises in the public sector whilst many were losing their jobs due to the government cuts to bring the budget deficit under control.
We could see higher wage inflation in the private sector, although with the British economy remaining in a fragile state, employers are more likely to want to build larger cash reserves and invest for the future, rather than spending available cash on higher wages.
Until the economy is healthy enough once again to support higher wages, price inflation is unlikely to become persistent and interest rates will stay low.
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