The drop in the Retail Price Index (RPI) could lead to more widespread pay freezes, according to economists.

Statistics from the Office for National Statistics showed the RPI had fallen from -0.4% in March to -1.2% in April - and since this is used by most employers to set wage levels, it could lead to further pay freezes and pay cuts.

Yesterday HR magazine reported the median pay settlement has fallen from 3.4% to 3% since the end of February and that a quarter of all deals so far this year are pay freezes. John Philpott, chief economist at the CIPD, believes the trend will continue.

He said: "With eight in 10 employers using RPI inflation as a cost of living benchmark when setting pay, and unemployment rising faster than at any time for a generation, the ongoing squeeze on pay is set to continue, particularly in the private sector.

"It is now almost certain that growth in average earnings will moderate to an annual rate of 2% or less by the end of the year."

But TUC general secretary Brendan Barber said: "Calls for widespread pay freezes are exactly the wrong reaction today. Of course employees and their unions understand the reality of companies hit hard by recession, but others can still afford reasonable increases that can then feed through into helping the economy recover."