The Chancellor Gordon Brown is squaring up to union leaders. In a letter to Brown's cabinet colleagues, the treasury has reiterated the need for this year's wage round to be pegged to the current inflation target of 2 percent.
The Bank of England governor Mervyn King has also warned union wage bargainers against seeking higher pay deals. Increased settlements, he claimed last week, would risk a 'self-defeating process of higher wages offset by higher prices'.
Both Brown and King have every reason to be worried. By November last year the gap between average earnings and inflation had fallen to zero. Real wages had stagnated.
But the retail price index (RPI) accelerated sharply in December from 3.9 percent to 4.4 percent. And with the full effects of January's interest rate hike yet to leave its mark, there is every chance that the RPI will be climbing to more than 5 percent soon.
Real wages will be falling by their fastest rate for 12 years.
If unions do not meekly accept the savage cut, King is warning that interest rates will have to rise again.
But that in turn will push the RPI up further, aggravating the contraction in real wages. Stamping down on wage expectations remains an integral component of economic policy.
In the public sector the squeeze on real incomes is likely to become even more pronounced. The latest figures show earnings there were rising by just 3.2 percent year on year, significantly below the RPI.
If the RPI hits 5 percent and the chancellor is successful in holdling settlements down to 2 percent, this could be the largest contraction for more than 15 years.
If the economy is growing so strongly that interest rates are having to rise, one might wonder why real wages are falling.
In truth, not everyone is suffering. Average earnings in the financial industry have risen by more than 8 percent over the past year.
According to the 2006 annual pay survey, 563,000 individuals working in 'financial intermediation' benefited from an average increase in their mean pay of 10.4 percent.
Their average yearly salary rose to £39,500. One select group, classified as 'other financial intermediation', probably including hedge funds, saw an average increase of 17.3 percent to £115,237 a year.
Even these averages understate the growth in incomes for those at the top end of the scale. That was underlined clearly by the record City bonuses paid out over the New Year, which on some estimates hit £9 billion.
So while wages are failing to keep pace with inflation, the average earnings for those outside of this charmed circle are falling even further behind.
The precise distortion caused by the booming financial sector can also be seen from last week's release of the gross domestic product statistics for 2006.
The economy expanded by 2.7 percent, faster than the Bank of England's Monetary Policy Committee (MPC), which sets interest rates, was clearly able to tolerate. 'Business services and finance' accounted for more than half of this growth.
Union leaders sympathetic to New Labour's strategy might be inclined to accept a squeeze in their members' real wages.
But there are no signs of restraint in the financial sector, which on current trends could surpass last year's record profit levels, driving bonuses and pay higher still.
The highly lucrative mergers and acquisitions, credit derivatives and emerging market sectors, will remain untouched by MPC policy.
The explosive growth of private equity funds, little more than asset strippers loading companies up with debt before selling them again at an inflated price, is still booming.
The authorities are relying upon non-financial workers to absorb the full burden of adjustment.
In short, Brown continues to only pay lip service to equality of income. Of course, a fightback by unions will be met with a hard response from the Bank of England.
And New Labour has presided over the biggest, and most reckless increase in personal debt levels on record.
As a result, today's interest rates of 5.25 percent imply that the cost of servicing mortgages is not that far short of the peaks sustained during the dark days of negative equity in 1991.
There is so much debt outstanding that base rates of 5.25 percent today are hurting just as much as the punishing rates of 15 percent under the Tories.
One or two more hikes will trigger a hard landing. Those at the bottom end of the income ladder, who have acquired disproportionately higher debt levels in a vain attempt to make ends meet, will suffer the most.
But in the long run, can union leaders afford to accept this?
The City has unquestionably benefited from globalisation.
But these very same forces, have undermined wages for many outside of the financial sector.
There is precious little evidence of 'trickle-down economics', not even for those who clean the hallowed halls of City investment banks.
Unless union leaders stand up for their members, Britain will become more and more unequal.
Gareth Taylor is a member of Respect