Fears of deflation as wage growth grinds to a halt

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Official figures showed wages were just 1% higher in July than in the same month last year - compared with growth of 1.9% in June and more than 3% for much of last year.

The data also showed public sector workers are still enjoying decent pay rises while private sector employees struggle.

Economists forecast pay rises will get even smaller in the coming months, and even turn into pay cuts as employers battle their way through the recession.

"This slowdown in pay growth highlights clearly why the risk of deflation is still alive and well," said Vicky Redwood at Capital Economics.

It came as unemployment rose by 210,000 to 2.47 million or 7.9% of the workforce at the end of July - the highest level since 1995.

Redwood said rising unemployment and subdued wage growth meant firms could start cutting prices, "potenially kicking off a vicious cycle of falling prices and earnings".

The figures showed private sector wages were up just 0.6% in July compared with 2.5% in the public sector workers.

Average pay increases over the last three months were 1.2% in the private sector and 3.4% for Government employees.

The public sector is also expanding while the private sector shrinks, according to the Office for National Statistics.

Some 13,000 public sector jobs were created in the three months to the end of July, while 230,000 jobs were lost in the private sector.