Pay awards: What chance a wage-price spiral in 2010?

With pay awards having settled into a low but stable pattern so far in 2010, the risk of a wage-price spiral – in which higher inflation, coupled with higher inflation expectations, would feed through into higher wage demands – might seem distant. But this remains a key concern for the Bank of England Monetary Policy Committee (MPC) – the body responsible for setting interest rates and trying to keep inflation in check.

According to BBC economics editor Stephanie Flanders (external website):

[T]he MPC is keeping a very close eye on inflation expectations – and pay settlements – to see whether the higher headline rates of inflation in the past few months are becoming self-perpetuating. There is not much sign of that so far.

Inflation is currently subject to an ongoing spike (subscription required). Latest data show the Government’s target measure – consumer prices index (CPI) inflation running at 3.4% in March 2010, some 1.4 percentage points above the MPC’s target rate of 2%. Meanwhile, retail prices index (RPI) inflation – the most widely used measure among private sector pay setters – has hit 4.4%. RPI is therefore 3.4 percentage points above the headline whole economy pay award of 1%, as measured by pay specialists at IRS for XpertHR.

But while pay awards are lagging a long way behind inflation, there is comparatively little that employees can do. The balance of industrial relations has shifted in employers’ favour as a result of the recession and ongoing high unemployment.

Nonetheless, IRS/XpertHR pay and benefits Editor Sarah Welfare notes that the current inflation spike may exert some influence on private sector pay awards (subscription required) in the crucial April pay bargaining round  – the first IRS/XpertHR analysis of which will be published to XpertHR’s Pay and Benefits homepage (subscription required) on Friday 28 May 2010.

However, she also notes that “[i]t is unlikely that the rise in inflation will have any effect on public sector pay deals”. Pay freezes are an increasingly common feature of the public sector reward scene.

Overall then, it seems likely that while UK workers will continue to feel the pinch of below-inflation pay awards over the coming months, a wage-price spiral appears unlikely at present. Pay awards look set to remain “the dog that didn’t bark” in 2010 – but given the scale of the 2008/2009 recession, this is arguably less of a surprise than it was in 2008.

  • If your organisation has recently carried out an annual pay review – and if it has now been settled – please get in touch so that we can add your organisation’s pay award to the IRS database.

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