A jump in wage inflation

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The BBC reports that the annual growth in wage inflation has jumped from 3.4 per cent in November to 4 per cent in December.

Several factors seem to be pushing wages higher

The rise in the rate of retail price inflation - it seems that many wage negotiations use the RPI measure of inflation as a starting poiint for pay talks. Increases in energy costs and food prices - both of which feed directly into the RPI and CPI of course - are highly visible and transparent to households - millions of people are now struggling to cope with sharp increases in petrol and gas prices together with real terms increases in rail fares and electricity bills Pay rises of 4 per cent or higher are now needed simply to keep pace with inflation so that real incomes are maintained With the economy weakening and business profits under pressure, the current pay round might be the last opportunity to trade unions to negotiate wages higher for a little while - it will be more difficult to bid for inflation-busting pay rises when unemployment is rising and bargaining power is on the wane

The Bank of England will be watching the acceleration of wage inflation with some worry - pay rises not matched by improving productivity will drive unit labour costs higher and make it more difficult for the Monetary Policy Committee to cut interest rates when needed as 2008 progresses. There are now clearer signs that inflation expectations are on the rise - the key is whether people and trade unions have the collective bargaining power in the labour market to drive pay higher in response.