News

February 19, 2010

High inflation no justification for pay rises, claims CIPD

The current high rate of inflation is just a "temporary spike" and not a reason for employers to be pushed into giving pay rises they cannot afford, the Chartered Institute of Personnel and Development (CIPD) has warned.

Recent figures from the Office for National Statistics (ONS) revealed that inflation as measured by the Retail Price Index (RPI) – which 80 per cent of employers use as the key cost of living benchmark when delivering pay rises – rose sharply from 2.4 per cent in December to 3.7 per cent in January.

"There is a risk that higher inflation will trigger bigger wage rises than the UK's ailing economy can currently afford, even though the rise in both CPI [Consumer Price Index] and RPI inflation is a temporary spike that will almost certainly be followed by an equally sharp fall later in the year," said CIPD chief economic adviser, John Philpott.

"Small firms tend to deal with people on a more personal basis than larger firms, and so will appreciate better that employees may be struggling with the cost of living," he added. "They may be tempted to give them an increase for that reason, even if their cashflow is tight.

"But businesses should not give pay rises that they can't afford," said Philpott. "However, they should also be very wary of damaging goodwill for the long-term. If employees feel undervalued, they will leave the firm when conditions improve. Business owners need to manage pay expectations by being honest – for example, by explaining to staff that the only alternative to a continued pay freeze would be to make redundancies."

Philpott added that any pay rises that are given should be awarded fairly, to avoid resentment. "You should either give the same pay increase to everyone, or give a pay rise to someone who has demonstrably contributed more to the business," he said.

However, British Chambers of Commerce economist, Steve Hughes, said that RPI inflation would be less of an issue for small firms than cashflow.

"Realistically, firms will mainly look at their cashflow position and balance sheet when they are deciding whether to give pay increases," said Hughes. "However, staff might be aware that their living costs have increased significantly and they might make complaints if they don't feel their pay rise is enough.

"If a business needs to retain certain skills then they could also factor that into their decision whether to give a pay rise, but if they can't afford to spend any more of their outgoings on wages they must use clear reasoning to explain that," added Hughes.

The Bank of England has predicted that inflation could rise to 3.5 per cent this year, but will fall back below 2 per cent towards the end of 2010. Most economists expect the Bank not to increase interest rates so that the rate of inflation is reduced sooner.