Sharp fall in ‘cost of living’ inflation index will add to downward pressure on pay

19 May 2009

Figures published earlier today by the Office for National Statistics (ONS) show that the rate of inflation as measured by the headline Retail Prices Index (RPI) fell to -1.2% in April while inflation as measured by the Consumer Prices Index (CPI) moderated to 2.3%. John Philpott, Chief Economist at the Chartered Institute of Personnel and Development (CIPD) says that the sharp fall in RPI inflation – which CIPD surveys show is used by 8 in 10 employers as the ‘cost of living’ benchmark when deciding pay awards – will further depress growth in average earnings in the coming months.

Dr Philpott commented as follows:

“When a fall in the price of toilet rolls is one of the factors dragging down consumer price inflation, I guess we can conclude that the economy has finally hit rock bottom. And for many workers today’s RPI figures will finally flush away any hopes of a decent pay rise this year.

“With 8 in 10 employers using RPI inflation as a cost of living benchmark when setting pay, and unemployment rising faster than at any time for a generation, the ongoing squeeze on pay is set to continue, particularly in the private sector. It is now almost certain that growth in average earnings will moderate to an annual rate of 2% or less by the end of the year.”

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