UK wages continue to outpace inflation

Official data shows that average wages in the UK continue to outpace inflation, with wage increases in both the public and private sectors. Adjusted for inflation, wages rose by 3.4% in the period from October to December compared to the same period last year, according to data released by the UK's Office for National Statistics (ONS).

The UK unemployment rate remained unchanged at 4.4%, but the ONS advised caution regarding its employment data due to lower response rates in its employment survey. Previously, several companies warned that they planned to cut jobs and raise prices due to rising labor costs in April. Employers are concerned that increased National Insurance contributions, rising minimum wages, and reduced business rates relief could affect future wage growth and investment.

Excluding inflation, the ONS stated that annual wage growth (excluding bonuses) for October to December was 5.9%, up from the previous 5.6%. Income growth in the private sector was 6.2%, while in the public sector it was 4.7%. The UK's inflation rate, which measures the rate at which consumer prices rise over time, was 2.5% in the year to December, but is expected to rise again due to rising energy and water bills.

Yael Selfin, chief economist at KPMG UK, said she expects wage growth to show a "steady downward trend" in the coming months. Some economists believe that the slight increase in private sector wages, a figure closely watched by the Bank of England when deciding on interest rates, will not cause policymakers to change their "gradual" approach to lowering borrowing costs. Earlier this month, the Bank of England lowered interest rates from 4.75% to 4.5%.

Rob Wood of Pantheon Macroeconomics said that interest rate setters will remain "cautious" about cutting interest rates following the recent wage growth data release. Ms. Selfin said that the latest employment data shows that companies' willingness to hire has "weakened significantly." She stated that the hospitality and retail sectors are expected to be "disproportionately affected" by the upcoming cost increases because they employ a higher proportion of low-wage workers.

Jane Gratton, Deputy Director of Public Policy at the British Chambers of Commerce, added: "There is a limit to the additional costs that businesses can absorb without damaging jobs and investment opportunities. The government must do everything it can to reduce costs for businesses and ensure they have access to a skilled and healthy workforce." From April, employers will have to pay 15% National Insurance on earnings above £5,000 per year, instead of the current 13.8% on earnings above £9,100 per year.

The Treasury has repeatedly stated that its budget measures will provide businesses with the stability they need to invest and grow, but there are concerns that corporate layoffs will affect the UK's economic growth, which is the government's top priority in its efforts to raise living standards. A recent survey of UK employers showed that businesses are likely to raise prices to offset increased costs. If businesses do raise prices, there is a risk of further increases in inflation in the coming months, putting even greater pressure on household budgets.

According to the ONS, the estimated total number of job vacancies has fallen by 110,000 (11.8%) compared to a year ago, but remains above pre-pandemic levels. It also estimates that the number of employees in the UK increased by 21,000 in January to 30.4 million. Chris Eldridge, CEO of Robert Walters recruitment company for the UK, Ireland, and North America, said that it is now a "wait and see" situation to see what happens to the job market in early 2025.

He added: "The first major test will come at the end of this quarter (March), when we will see the changes to National Insurance contributions begin to take effect, and we are also awaiting progress on the Employment Rights Bill."