A surge in cost-of-living inflation is coming at the “worst possible time” for pay bargaining as it may trigger wage rises that many UK employers can ill afford, warns an HR professional body.
According to the Office for National Statistics (ONS), the annual inflation rate as measured by the headline Retail Prices Index (RPI) rose sharply in January to 3.7%, up from 2.4% in December. RPI is used as a key benchmark by eight out of 10 employers when determining pay settlements.
John Philpott, chief economic advisor at the Chartered Institute of Personnel and Development, said that late winter and early spring were key periods for pay bargaining, which meant that the jump in RPI inflation had come at an unfortunate time.
“There is a risk that higher inflation will trigger bigger wage rises than the UK’s ailing economy can current afford, even though the rise in both CPI [Consumer Prices Index] and RPI inflation is a temporary spike that will almost certainly be followed by an equally sharp fall later in the year,” he explained.
While such a prognosis was cold comfort for hard-pressed workers facing cost of living increases, real wages would have to be squeezed to preserve jobs and minimise further increases in unemployment numbers, Philpott added.
Other ONS figures released today indicated that 2.8 million people were officially “underemployed” between July and September last year, a sharp jump from the 2.1 million over the same period two years ago.
The figures come on top of the 2.6 million who are officially unemployed and equate to 31.6 million hours of extra “work wanted”, the equivalent of 3.4% of the total hours worked and a rise of 6.2 million hours on the previous year.
The main driver behind the move to a more casualised workforce was the sharp rise in the number of part-time workers who could not find a full-time job. Just over half a million people have also been forced to take temporary work while they try to find a permanent position, about 80,000 more than before the recession kicked in.
The jump in the CPI – the official measure of inflation, which unlike the RPI does not include mortgage payments – to 3.5% from 2.9% in December, meanwhile, resulted in Mervyn King, the governor of the Bank of England, writing a mandatory letter to Alistair Darling, the Chancellor of the Exchequer, to explain why the figure had jumped above the required 2% target.
King blamed three short-term factors for the leap, although he added that inflation was “more likely than not to fall back to the target in the second half of the year” because of a sharp fall in spending and a build-up of spare capacity in the economy as labour, plants and equipment lay idle.
The short-term factors behind the inflation boost were the fact that VAT had gone back to its pre-recession rate of 17.5%, oil prices had leapt 70% over the last year and sterling had depreciated sharply during 2007 and 2008, which had taken a long time to feed through into prices.
