Letters exchanged this morning between the Governor of the Bank of England and the Chancellor of the Exchequer following release of the May CPI inflation rate figure highlight the importance of ensuring that pay settlements do not accelerate in response to an increase in the cost of living.

John Philpott, Chief Economist at the Chartered Institute of Personnel and Development (CIPD), comments that the economy is unlikely to experience an old-style 'wage-price spiral' but agrees that average pay rises must remain modest to ensure that the economy avoids a substantial rise in unemployment:

"The code in Mervyn King's letter to Alistair Darling is that, come what may, British workers will have to accept a significant squeeze in living standards in the coming months. If this doesn't emerge through below inflation pay settlements the pain will be felt in the form of a more significant economic slowdown and a bigger rise in unemployment than already on the cards. In other words, if there are inflation matching pay hikes, the consequence will not be a damaging pay-price spiral of the kind the economy experienced in times past, but instead fewer jobs.

"The good news is that there is little sign of mounting pay pressure in the economy. Compared with previous eras when trade unions were significant players in the private sector, and pay often automatically followed increases in living costs, employers are better able to keep pay rises in check even when inflation is rising. However, it is vital that restraint is maintained in this current period of sharply rising fuel and food prices. The Chancellor is therefore absolutely right to call for continued pay restraint in both the private sector and public sectors.

"This is thus likely to be a challenging time for employers, who will need to convey to staff the importance of responsible pay deals and ideally demonstrate that restraint will be observed at every level, from the Board to the shop-floor and office."

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Notes to editors:

· John Philpott is available for interview.

· The Chartered Institute of Personnel and Development (CIPD) has over 130,000 members and is the leading professional institute for those involved in the management and development of people.

· Read John Philpott's weekly blog on the CIPD website

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