The sharp rise in inflation announced today is expected to cast a shadow over wage negotiations as employers plan their pay deals for 2012, experts have said.

The Office for National Statistics reported rises in both inflationary measures, with the Consumer Prices Index (CPI) inflation jumping to 5.2 per cent from 4.5 per cent in August, and the Retail Prices Index (RPI) rising to 5.6 per cent from 5.2 per cent.

This will squeeze the spending power of both staff and employers as the UK economy struggles to regain strong growth.

Charles Cotton, CIPD reward adviser, said: “The main impact of the increase in inflation will be on next year’s pay decisions because organisations that have a January ‘pay start’ date will begin looking at the economic climate they face.

“If the economy is doing well, then they can afford to be generous but if it’s not then perhaps employers might be less inclined to give a higher pay rise.”

However, Cotton said that inflation was only one element influencing pay, although it is an important one. Competitors’ pay rates, as well as internal factors such as how well the company and individuals are performing, influence the final judgment on the size of the pay budget.

Cotton highlighted other influencing factors such as the introduction of auto-enrolment next year.

He said: “Will the pay be lower to accommodate for the fact that employers will be contributing to people’s pension arrangements - for the first time in some cases?”

Speaking to PM the day before the announcement, Alastair Hatchett, head of pay and HR services at Incomes Data Services, gave his predictions for inflation and its impacts on next year’s pay deals.

“Given that inflation has remained high over the last year and most people have had quite low pay increases, a bit of a head of steam has been developing about ‘pay catch up’ or how to enable employees to keep more of their disposable income,” said Hatchett.

“A lot of people [employers] have been trying to reach for the level of inflation - currently over 5 per cent - but not quite getting there and that's down to company affordability and the general performance of companies.”

Inflation projections in IDS's quarterly report forecast RPI inflation will be 4 to 4.5 per cent at the start of 2012, potentially dropping to 3.2 per cent to 3.5 per cent later in the year.

Hatchett said that the impact of a slower UK economy could push the inflation rate down a little bit faster but that price increases from the utilities companies are pushing inflation up.

January will see a “slight decrease” because the increase in VAT from January 2011 drops out of the annual measure, he said, but there will be slightly less inflation in 2012 than in 2011 and it will be on a downward trend.

This tallies with predictions from the governor of the Bank of England Mervyn King, who said he expects inflation to fall next year.