UK Wage Growth Outpaces Inflation

New data from the Office for National Statistics (ONS) shows that UK wages are rising faster than inflation, bringing relief to workers but raising concerns for businesses.

Between October and December, wages—adjusted for inflation—grew by 3.4% compared to the same period last year. Without adjusting for inflation, annual pay growth (excluding bonuses) reached 5.9%, up from 5.6%.

• Private sector pay grew by 6.2%
• Public sector wages increased by 4.7%

Rising Employment Costs Could Lead to Job Cuts and Price Hikes

Despite strong wage growth, many businesses are warning of job cuts and price increases ahead of higher employment costs in April.

Starting in April 2025, employers will face higher National Insurance contributions, increasing from 13.8% on salaries above £9,100 to 15% on salaries above £5,000. Additionally, businesses are dealing with:

• Rising minimum wages
• Reduced business rates relief
• Higher energy and operational costs

To offset these rising costs, many companies may raise prices, potentially leading to higher inflation and increased pressure on household budgets.

UK Inflation and Interest Rate Outlook

The UK inflation rate stood at 2.5% in December but is expected to rise again due to higher energy and water bills.

While the Bank of England recently cut interest rates from 4.75% to 4.5%, experts suggest further cuts may be delayed due to private sector wage growth.

Economists remain divided on whether higher wages will significantly impact Bank of England policies, but for now, rate setters are adopting a cautious approach.

UK Job Market Trends: Hiring Slowdown Expected

Despite steady UK unemployment at 4.4%, new data suggests the job market is weakening:

• Job vacancies have fallen by 110,000 (11.8%) over the past year
• UK payroll employment increased by 21,000 in January, reaching 30.4 million

However, experts warn that hiring may slow further, particularly in industries like retail and hospitality, which employ a large number of low-wage workers.

Yael Selfin, chief economist at KPMG UK, predicts a "steady downward trend" in wage growth over the coming months, while some businesses struggle to absorb rising costs.

How Businesses and Workers Will Be Affected

A recent survey suggests that many businesses will pass rising costs onto consumers by increasing prices, which could fuel further inflation.

Jane Gratton, deputy director of the British Chambers of Commerce, urges the government to minimize costs for businesses and support workforce development.

Meanwhile, Chris Eldridge, CEO of Robert Walters, warns that the full impact of wage changes will become clearer by March 2025, when the new National Insurance rates take effect.

What’s Next for UK Wages and Inflation?

The UK government insists that its budget measures will provide economic stability, but businesses remain cautious about investment and hiring.

If companies cut jobs or raise prices, it could slow UK economic growth—a key priority for the government as it aims to boost living standards.