Unemployment has fallen to the lowest level since last spring but wage increases have remained muted, official figures showed today.

The jobless total fell by 29,000 in the three months to November to 1.67 million, the second successive quarterly reduction. The number of people claiming jobseekers’ allowance was 5,500 lower in December at 943,100, the third consecutive monthly fall, to give the lowest total since March.

The Office for National Statistics also said average earnings, excluding bonuses, in the three months to November were 3.7 per cent higher over the previous year, unchanged on the downwardly revised October rate. The rise was a shade below economists' expectations of 3.9 per cent.

Including bonuses, earnings rose by 4.1 per cent, unchanged on the October rate and below the 4.2 per cent rise predicted by analysts.

However, today’s figures will do little to calm some fears of a brewing wage-price spiral after it emerged yesterday that the retail prices index measure of inflation, used to calculate many pay deals, soared to 4.4 per cent in December, its highest level since December 1991.

Inflation, as measured by the consumer price index, the Government's preferred measure, which strips out housing costs, rose to 3 per cent, well above the Bank of England's 2 per cent target and just shy of the level at which Mervyn King, the Bank’s Governor is obliged to write an explanatory open level to the Chancellor.

Economists said that the Bank would now monitor pay deals in the coming weeks closely. Another rate rise in the next couple of months is still seen as a strong possibility.

Howard Archer, chief UK economist at Global Insight, said: "Muted average earnings in November provide some rare recent good news for the Bank of England, but the data will have only limited influence on their thinking."

Economists agree that annual wage settlements over the coming weeks will figure far more highly for inflation and interest rate prospects.

Mr Archer said: "There is clearly a very serious risk that wage settlements will move significantly higher in the 2007 pay rounds in reaction to RPI inflation rising to a 15-year high of 4.4 per cent in December.

He added: "A key question is to what extent will the slack in the labour market limit the bargaining position of workers and contain pay settlements."

In a sign that Gordon Brown is succeeding in his efforts to rein in public sector wages, public sector earnings growth, excluding bonuses, in the three months to November remained at 3.1 per cent compared with the previous year. Those including bonuses fell to 3.2 per cent in the three-month period, its lowest rate since January 1998’s 2.9 per cent.

The broader ILO unemployment rate was flat at 5.5 per cent.

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