The UK is seeing the fastest growth in real wages in over three years, driven by strong private sector earnings. According to the Office for National Statistics (ONS), pay after inflation rose by 3.4% between September and November, compared to the same period in 2022.

Private Sector Wages Lead the Growth

Private sector pay increases have significantly outpaced those in the public sector. The average weekly earnings in the UK reached £660 in November, with inflation now down to 2.5%. This marks the first time in years that wages have risen faster than inflation, providing workers with more disposable income.

Bank of England Expected to Cut Interest Rates

Despite concerns that rising wages could drive inflation higher, the Bank of England is expected to cut interest rates in February. Current rates stand at 4.75%, but market predictions point to a reduction to 4.5%, following an unexpected drop in inflation last month.

Experts Weigh In on Wage Growth and Inflation

Sarah Coles, head of personal finance at Hargreaves Lansdown, said:

“Pay hasn’t outpaced inflation this clearly in over three years. It’s leaving workers with more money at the end of the month.”

However, she warned that if wages continue to rise, it could delay interest rate cuts. Ashley Webb, a UK economist at Capital Economics, noted that private sector pay growth might raise concerns for policymakers, but signs of a weakening labor market could still prompt a rate cut.

UK Labor Market Trends

The latest ONS data shows a slight rise in unemployment to 4.4%, while job vacancies dropped by 2.9% to 812,000 from October to December. Vacancies remain above pre-pandemic levels, but the ONS urged caution with the data due to low response rates.

Petra Tagg, director at Manpower UK, highlighted that businesses are offering higher salaries for skilled roles in engineering, IT, and artificial intelligence, but fewer workers are switching jobs due to economic uncertainty.

Impact of Business Tax Increases

Economists at Pantheon Macroeconomics observed that employment dipped in December, as companies paused hiring following £40 billion in business tax hikes. These include changes to National Insurance and reduced thresholds for employer contributions. Many businesses warn that rising costs could limit wage increases and job creation.

Rob Wood, chief UK economist at Pantheon, added:

“The labor market is loosening gradually, but there’s no sign of a sharp downturn.”

Future Outlook on Pay and Inflation

While workers enjoy higher pay now, experts like Sarah Coles caution that wage growth may slow later this year as businesses face rising costs. Worker shortages in key sectors like healthcare, IT, and construction remain a challenge, pushing employers to offer competitive salaries.

However, higher disposable income can fuel consumer spending, potentially driving inflation back up by increasing demand for goods and services.

Key Stats on Wage Growth and Inflation

• Regular pay growth: 5.6% annually (Sept–Nov 2023)
• Real pay growth after inflation: 3.4%
• Inflation rate: Down to 2.5%

Government’s Focus on Employment Growth

Work and Pensions Secretary Liz Kendall emphasized the need to boost employment and improve living standards. She said:

“We are working to get the economy growing by reforming Jobcentres and guaranteeing opportunities for all young people to earn or learn.”

Source: BBC.co.uk