Caution outweighs manufacturing sector wage demands

The fact that average earnings are growing at just 1.8% is a surprise, says Markit chief economist Chris Williamson, suggests that the longer-term inflation outlook is even more benign than previously expected. "Clearly, inflation is not feeding through to higher wages, which should help to subdue inflation once the effects of higher VAT, the recent surge in commodity prices and sterling's depreciation wane in 2012," he says. "The weakness of the labour market - claimant unemployment rose by 2,400 in January - continues to result in widespread job insecurity, meaning employees are wary of pushing for higher pay. "The increase in unemployment also serves to highlight the fragility of UK economy, and further bolsters the case of the doves on the Bank of England's Monetary Policy Committee, who believe that an early hike in interest rates would threaten the recovery and increase the risk of pushing the economy back into recession." Meanwhile, manufacturing pay data for the three months to the end of January 2010 shows that the average pay settlement remained at 2.2%, the same figure as the three months to the end of December. The number of pay freezes has fallen slightly but still remains at just over 1 in 6 settlements, reflecting continued downward pressure to contain internal costs. Commenting on these latest figures, EEF chief economist Lee Hopley said: "Fears of an escalation in manufacturing pay settlements appear to be largely unfounded as economic uncertainty continues to outweigh demands for higher wages. "Firms remain under intense pressure to control their internal costs in the face of global competition and these figures would suggest as yet the Bank of England has little to fear from inflationary agreements in manufacturing."