Pay rises 'to accelerate in 2007'

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Rising inflation will push up private sector wage bills by between 3% and 4.5% next year, according to a report.

But public sector pay will rise by just 2% as the Treasury tries to keep a tight rein on spending, pay researchers Income Data Services (IDS) said.

IDS said energy costs would drive the retail price index (RPI) up to 4% by the end of 2006.

This would set the benchmark for the two most important months for striking pay deals - January and April.

Interest rates

"The RPI inflation measure is the key to pay setting in the private sector," the report's editor said.

"Inflation close to 4% will be a very strong upward pressure on the level of pay settlements."

Strong growth in wage levels will raise fears that inflation is on an upward trend, and will put more pressure on the Bank of England's Monetary Policy Committee to raise interest rates again this year.

The benchmark rate was raised to 4.75% in August, and some analysts expect a further quarter percentage point increase in November.

The latest set of UK inflation figures showed that RPI rose to 3.4% in August, from 3.3% the month before.

The Consumer Prices Index (CPI) rose to 2.5% in August from 2.4%. The Bank of England is tasked with setting interest rates to meet the government's CPI inflation target of 2%.

The median level for private sector wage increases this year has been 3%.