Pay squeeze as inflation hits new low: Rate of price rises at 1.7% is lowest since 1967 - Nurses, forces, teachers face 1.5% wage ceiling

Government resolve to crack down on spending - reinforced with public sector pay awards of 1.5 per cent or less announced yesterday - was boosted by a fall in the annual inflation rate to 1.7 per cent last month from 2.6 per cent in December.

However, while the lowest inflation rate since 1967 was hailed in parts of the City as a watershed, the 1.5 per cent deal for the medical professions and armed forces, with less for teachers, was attacked by unions as a pay cut.

The plunge in inflation was welcomed by the Chancellor as 'the best news for everyone'. But Norman Lamont said: 'I do not see scope for further reductions in interest rates.' He said that he was also concerned about the situation of savers.

However the markets continued to expect a further cut around the time of next month's Budget, another factor weakening the pound.

Falling mortgage rates and deep price discounts in the January sales drove the annual inflation rate down.

The effect of devaluation of the pound - which briefly touched another new low of under DM2.33 yesterday - has yet to feed through into the economy.

Excluding mortgage interest payments, the underlying rate dropped 0.5 percentage points during the month - the largest fall on record - to stand at an annual 3.2 per cent.

The development flew in the face of widespread City forecasts that the underlying rate would climb towards the Treasury's 4 per cent ceiling or breach it.

But Gordon Brown, Labour's shadow Chancellor, said: 'Today's figures reflect the fact that people are not buying anything or producing anything. The central problem we must confront is the low level of activity in the economy and rising redundancies, which reflect low consumer and business confidence and unemployment approaching 3 million.'

There was some apprehension in the City too that February figures may show a bounce back in sales prices.

After publication of four independent pay review body reports yesterday, John Major said in a Commons written reply that the Government would pay wage increases of 1.5 per cent to doctors and dentists, nursing staff, midwives and health visitors, professions allied to medicine and the armed forces.

He added that the review bodies had been asked to consider developing performance pay to reflect the Citizen's Charter commitment to linking people's contributions and rewards.

In a deviation from the School Teachers' Review Body recommendation, Mr Major said qualified classroom teachers would get a 0.55 per cent increase on 1 April, plus a one-off pounds 90 payment a month later. 'This together with the implementation of restructuring designed to develop the relationship between pay and performance in schools, will give teachers, in common most other review body groups, an increase in pay of 1.5 per cent, while containing the total cost within the settlement limit,' he said.

Head and deputy head teachers will get 1 per cent, as recommended by the review body.

Mr Major's announcement is in line with his November warning that public sector pay settlements would be limited to nil to 1.5 per cent. It was attacked as arbitrary, unacceptable and insulting by representatives of the hundreds of thousands of workers affected.

According to the Government, an 18-point teachers' pay structure, ranging from pounds 11,244 to pounds 30,441 and to be introduced from September, would bring the overall pay package up to 1.5 per cent. David Hart, general secretary of the National Association of Head Teachers, dismissed the package as 'appallingly low' and a poor reward for the work staff had done to implement government changes.

Doug McAvoy, general secretary of the National Union of Teachers, said: 'The Government's intense dislike of teachers is demonstrated by the way it has singled them out for unequal and unfair treatment.'

The imposed pay structure was a 'confidence trick' to remove protected pay levels and introduce government merit money, he said. 'The pay of each teacher will be dependent on the resources of the school.'

In an unprecedented move, health unions refused to accept a review body recommended increase for nurses, midwives and health visitors. They will now consult members to see whether they wish to accept the rise or consider industrial action. Newly qualified nurses will get pounds 13,449 under the deal, and ward sisters pounds 15,184.

David Blunkett, Labour's health spokesman, said the nurses' pay review body recommendation represented a 'direct cut in the living standards of vital health service staff. It is a blow to morale, which is already dangerously low.' But the body had been put into an impossible position by the Government.

David Evans, deputy editor of the IDS Report, published by Incomes Data Services, said the company's latest pay analysis showed that about half of all pay settlements were running at 3 to 4 per cent. Most were in the private sector. He said: 'Public sector increases will be among the lowest we are likely to get in 1993.'