LRD: Inflation the new factor for 2010

From Labour Research Department

The return to positive inflation is likely to influence pay deals in the months ahead, but as yet it is too early to say whether this will outweigh the effects of recession, continuing job losses, or public sector pay curbs. With fewer existing long-term deals to boost settlement levels this year, newly-negotiated private sector deals will set the trend.

After eight months of negative figures, the Retail Prices Index (RPI) was back in positive territory in November, rising annually by 0.3%, and is expected to rise further: If so, RPI inflation and the pay settlement trends will converge. Over the three months up-to and including November, settlements stuck to the established pattern with a mid-point of 2%, 1.5% in the private sector. The public sector was up slightly (2.6%) and manufacturing down slightly (1.2%) with services broadly steady on 2.4% (Workplace Report, December 2009).

As in earlier months, if existing long-term deals (negotiated in most cases before the recession took hold) are taken out of the picture the overall mid-point increase on lowest basic rates was lower, at 1.2%. Pay freezes accounted for three out of ten of these new settlements and a fifth of all settlements (including existing deals), also consistent with the established pattern.

With few settlements recorded for December and little information yet in on January deals, it is too early to say confidently what will happen in the New Year. Where a specific value for pay rises in 2010 had already been agreed the figures suggest a median of around 2.5% (Workplace Report, October 2009). But with fewer existing long-tem deals in place for 2010, much will depend on how negotiators react to rising RPI inflation.