Pay cuts loom as prices fall to 61-year low

AN ESTIMATED 80 per cent of workers face the prospect of a pay freeze or cut, after the measure of inflation used for the majority of wage settlements plunged last month.<br /><br />The Retail Prices Index (RPI), which is used for workers&rsquo; wage settlements and includes mortgage and rent payments, shrank to -1.2 per cent year-on-year in April, from -0.4 per cent in March &ndash; marking its steepest decline since records began in 1948. The measure has almost halved in the past year as the Bank of England has slashed the interest rate to its current historic low of 0.5 per cent dramatically reducing mortgage payments.<br /><br />Excluding mortgage payments, RPI inflation fell from 2.2 per cent to 1.7 per cent, the figures from the Office for National Statistics show.<br /><br />With an estimated eight in ten employers using the index as a cost of living benchmark when setting pay, the Chartered Institute for Personnel and Development (CIPD) warned yesterday that growth in average earnings was set to moderate to an annual rate of two per cent or lower by the end of the year.<br /><br />&ldquo;The ongoing squeeze on pay is set to continue, particularly in the private sector,&rdquo; said CIPD chief economist John Philpott.<br /><br />Meanwhile, the official measure of inflation, the Consumer Price Index (CPI), which excludes housing costs and is the measure targeted by the government, fell to 2.3 per cent year-on-year in April, from 2.9 per cent in March. While the fall was steeper than expected, taking it to its lowest level since January last year, it remains above the Bank of England&rsquo;s two per cent target.<br /><br />The main reasons for the fall were a decline in food prices and recent reductions in gas and electricity prices. Economists expect both CPI and RPI to fall further and warned yesterday that low inflation caused by unemployment and slack demand, could become a problem.<br /><br />&ldquo;The numbers should act as a reminder that excessively low inflation, and perhaps even deflation, remain a bigger risk over the next year or two than a sharp upturn in inflation,&rdquo; said Jonathan Loynes of Capital Economics.