National Minimum Wage

National Minimum Wage
134
so-called ‘formula effect’ – which has resulted in RPI rates typically averaging around
0.7 percentage points above CPI since 1989.
5.15 The Governor contended that the upward pressures he had identified would be short-lived in
their effects and CPI should slow further in 2012 to around the 2 per cent target or slightly
below towards the end of the year. For example, the effects of the 2011 VAT increase will fall
from the index during 2012, reducing CPI by around 1 percentage point. The slowing in the
world economy will put downward pressures on commodity prices, with the World Bank
expecting non-oil commodity prices, which had risen 20.7 per cent in 2011, to fall by 9.3 per
cent in 2012, and oil prices, having risen 31.6 per cent in 2011, to fall by 5.6 per cent. Finally,
the large increases in domestic energy prices in the autumn of 2011 were unlikely to be
repeated in 2012 – in fact, most major providers had already announced falls in some prices.
This prognosis is supported by other forecasters: the median of the independent forecasts
published by HM Treasury in January 2012 has CPI at 2.1 per cent in the fourth quarter of
2012, while in its November 2011 Economic and Fiscal Outlook the OBR forecasts a slightly
higher CPI fourth quarter figure of 2.4 per cent.
5.16 RPI will be subject to the same downward pressures in 2012, although the formula effect is
expected to keep the rate above CPI. The median of January forecasts shows RPI at 2.8 per
cent in the fourth quarter of 2012, exactly in line with the OBR forecast.
5.17 Given the broad consensus around the forecasts, and the disinflationary pressures
highlighted by the Bank of England (and already evident), the path for inflation over the next
twelve months is expected to be clearly downwards. However, in its November 2011
Inflation Report the Bank of England cautioned that both the pace at which CPI would fall,
and how far it would fall, were uncertain. The pace of decline could be slowed, for example,
if companies sought to restore profit margins, which were below their pre-recessionary
average levels, or if they sought to pass on previous increases in import prices where full
adjustment had not yet taken place. A slower than expected rate of decline could also feed
into inflation expectations putting upward pressure on pay growth and adding to employers’
costs. In light of these uncertainties we can do no better than note the inflation forecasts
and, while expecting the rates of increase to slow, exercise caution.
5.18 Research has long indicated a strong medium to long-term relationship between the rate of
inflation as measured by RPI and the level of basic pay increases, and, more recently, Dolton,
Makepeace and Tremayne (2012) have confirmed these findings. In the short-term, however,
especially in periods when the inflation rate is particularly volatile, this relationship may break
down. Certainly, during the period of recession and weak recovery of the last few years,
basic pay has increased much more slowly than RPI resulting in quite large and prolonged
real cuts in pay rates. Factors other than inflation are therefore clearly influential. The
Chartered Institute for Personnel and Development (CIPD) (2011) noted an organisation’s
ability to pay, productivity and performance, the going rate of awards elsewhere, and
recruitment and retention issues, alongside inflation as key determinants of pay increases.
It is worth noting that the balance of these factors varies across and within sectors, and base
pay adjustments across the economy as a whole reflect this.