The average pay rise in the private sector is now 4% a year, according to data released by Incomes Data Services.

The organisation claims the rise is due to an increase in the Retail Price Inflation index, which increased from 4.2% to 4.3% in November, and warned that the trend risked a higher rate of inflation.

"While the jury is still out on the extent to which the credit crunch in finance will affect the rest of the economy, our initial look at January deals confirms the continued influence of high inflation on pay negotiations in the private sector," said Ken Mulkearn, editor of the IDS Pay Report.

Along with price increases in the food, fuel and commodities sectors, rising wage inflation could scupper hopes of further interest rate cuts to boost the economy later this year.