Three month average pay settlement for manufacturers in January was 1.9 percent, fractionally higher than the average of 1.8 percent across 2016. The average pay deal in January was a shade higher at two percent – barely outstripping consumer price inflation at 1.8 percent. Comment from Lee Hopley, Chief Economist at EEF.

After a steady rise over the course of 2016, the proportion of pay freezes has fallen back to nine percent of settlements. The latest Pay Bulletin data from EEF, the manufacturers’ organisation, shows that average settlements have gone up, while pay freezes have gone down. But, while the data bodes well for the rest of 2017, the acceleration remains modest compared to that of consumer price inflation meaning that workers could still end up feeling the pinch while employers could come under wage pressure.

With a significant number of pay settlements being agreed at the January bargaining round, the monthly data is a useful predictor of wage growth across manufacturing for the year ahead. The monthly average pay settlement for January alone was a shade higher at 2.0 percent, slightly up from the average pay deal of 1.8 percent the same month a year ago. Between November and January, two-thirds of pay deals were agreed at or below two percent, consistent with the distribution of settlements over the past year. However, the upward move in the average pay deal in January reflects two major trends at both ends of the pay spectrum.

The first is the fall in the proportion of settlements resulting in a pay freeze. Pay freezes became a more prominent feature for manufacturers in 2016, peaking at 26 percent of settlements in August as firms became more cautious in the face of uncertainty. But in January this year, the share of pay freezes fell back to nine percent of settlements agreed since November and to seven percent of settlements for January alone. The second is a slight uptick in the proportion of pay deals agreed above two percent. These accounted for one in three pay settlements in the three months to January, most of which fell in the 2-3 percent range. By contrast, pay deals above three percent remain few and far between, accounting for only 3 percent of settlements.

Lee Hopley, Chief Economist at EEF, the manufacturers’ organisation, said: “The first indications from the January major pay round show an increase in average settlements across manufacturing at the start of 2017. The rise is moderate, however, compared to the faster acceleration in consumer price inflation. While more companies are offering pay increases in January, the largest proportion of pay deals remain at or below teo percent, only a shade higher than the 1.8 percent increase in consumer prices.

“As uncertainty continues around business conditions, manufacturers remain cautious when it comes to pay rises. In addition, the recovery in oil and commodities prices and the dive in sterling have caused a surge in input costs, squeezing manufacturers’ profit margins and acting as a drag on the affordability of higher pay levels. But with CPI set to breach the Bank of England’s two percent target in the coming months, there could be some pressure coming on future pay deals.”