Howard Archer, UK and Eurozone chief economist for Global Insight, shares his thoughts on the current wage climate, interest rates and inflation

‘The Bank of England is keeping a particularly close eye on the UK’s wage bill at the moment,’ explains Archer, ‘as there’s been a jump in the measure used for wage bargaining. Inflation on the Retail Price Index (RPI) measure hit 3.7 per cent last month – the highest since June 1998 and up from 2.2 per cent at the end of last year.’

The RPI is the standard measure of inflation in the UK and is calculated each month by taking a sample of goods and services that the typical household might buy. It traditionally influences pay negotiations at the start of every year, where UK employees argue salaries should increase in line with inflation.

Archer says, ‘The latest RPI rise will have an impact on January’s pay bargaining round and could pile extra pressure on the Bank of England to increase interest rates again to counteract the affects. There’s a risk of a further quarter-point rise on top of the two recent increases.

‘However, the size of the labour force is growing rapidly due to an influx of workers from overseas and changing domestic demographics resulting from later retirement ages and so on. This expanding pool of labour dilutes the bargaining power of employees and may, therefore, counteract the demand for pay increases and negate an interest rate rise. It will be interesting to see which economic driver will win out.’