The average pay increase is now 3.5 per cent – up 0.5 per cent on the previous quarter and at their highest since November 1998 – according to two quarterly reports.

Both pay specialists Industrial Relations Services (IRS) and the Labour Market Outlook survey from the Chartered Institute of Personnel and Development (CIPD) and KPMG are reporting an average pay rise of 3.5 per cent.

According to IRS, pay deals based on merit are running at an average of 3.6 per cent, while awards in the manufacturing sector are matching the national average, whereas those in the services sector are slightly below average at 3.4 per cent.

Both IRS and CIPD agreed that higher inflation figures are feeding into the busy spring pay round – and that the trend for pay rises above 3 per cent will continue.

The picture is made more complicated by the number of employers who said they expected to face recruitment difficulties in 2007. Eighty-two per cent of employers surveyed are expecting to recruit in the next three months – and 46 per cent think they will have trouble doing so.

John Philpott, the CIPD’s chief economist, said: “On the face of things conditions in the labour market look conducive to moderate pay settlements this winter, with enough willing workers, especially migrants, to help employers withstand claims for inflation matching pay rises. But as our survey shows, the situation on the ground is more complicated.

“Aside from the commonly observed tendency for some pay settlements to track the Retail Price Index seemingly regardless of the balance of supply and demand, a growing proportion of employers report difficulty in finding recruits with the attributes they are looking for. Lack of quality in the available labour supply might therefore mean that the market is tighter and potential wage pressure higher than measures of the amount of labour available suggest.”