Pay awards for workers in the service and manufacturing sectors rose in the last three months.

The rises were a response by firms as they struggled to recruit and retain staff and cope with rising living costs.

The quarterly Pay Data Bank study from the Confederation of British Industry showed service sector pay awards averaged 3.8 per cent in the three months to June, compared with 3.4 per cent in the three months to March and 3.5 per cent at the same point last year.

In manufacturing, by comparison, pay awards were 2.9 per cent in the three months to June, up from 2.5 per cent in the previous three months, and against 2.7 per cent at the same time in 1999. The CBI said the need to recruit and retain staff was the key reason for driving up pay awards in the service sector.

In manufacturing, rises in the cost of living were the main factor. However, 46 per cent of manufacturers said their inability to raise prices had kept pay awards down over the past year and 35 per cent were affected by low profits.

A total of 19 per cent of service sector firms signalled similar reasons for keeping settlements down.

Yet the CBI warned the rises were not inflationary and should not be seen as an excuse by the Bank of England's Monetary Policy Committee to raise interest rates from their current six per cent.

CBI chief economist Kate Rankin said: "Firms are still facing strong competitive price pressure. We do not expect this pick-up in settlements to put the inflation target at risk."

Last week, Office for National Statistics figures showed average earnings increasing by 4.1 per cent in June. The CBI said the reason for the difference was that the CBI figures stripped out the effect of bonuses. The Pay Data Bank survey covers 1,500 private sector settlements or pay awards for two million employees made every year.