Summary of the editorial from IDS Pay Report 996, March 2008

Inflation remains a concern for policy-makers and wage-setters alike

In a recent speech, Kate Barker, a member of the Bank of England’s Monetary Policy Committee (MPC), outlined the upward pressures on inflation in the UK. She said: ‘Higher global prices, particularly for energy and food, are still feeding through the supply chain, amply illustrated by the sharp rises in producer price inflation in January, both for input and output prices.’

Her speech drew on the latest monthly inflation report from the Bank, for February, according to which inflation is set to rise sharply in the near-term, with higher energy, food and import prices the main drivers. Indeed, the latest increase in the all-items RPI, which rose to 4.1 per cent in the year to January, appears to bear this out. According to the ONS, petrol and oil prices, as well as food prices, were important upward contributions to the change in the rate of inflation. This is higher than was predicted earlier (City analysts’ inflation forecasts, IDS Pay Report 993, p.15), though economists will have revised their forecasts since then, and we will be reporting these in a subsequent issue.

How is this likely to affect pay bargaining? Kate Barker considers that increases in energy and other imported costs imply less scope for wage rises, mainly because employers will not want to raise labour costs in line with their costs in respect of inputs like fuel. She also thinks that the current heightened economic uncertainty might lead to reduced wage demands as negotiators potentially become more worried about employment prospects.