UK pay growth has reached its highest level in over three years, rising by 3.4%. This increase is higher than inflation. The surge is mainly due to a strong rise in private sector earnings.
The Office for National Statistics (ONS) reports that from September to November, pay increased by 3.4% compared to last year after inflation.
Private sector wages played a big role in this growth. They grew faster than public sector wages. This is a key moment for households, as wages now outpace inflation, giving people more disposable income.
Interest Rate Outlook Amid Wage Concerns
Despite fears that rising wages could contribute to higher inflation, the Bank of England is still expected to lower interest rates in February. Current rates stand at 4.75%, but market predictions suggest a potential drop to 4.5%. This expectation follows a recent, unexpected decline in inflation, now at 2.5%, according to the latest figures.
Average weekly earnings reached £660 in November, marking the first time in years that pay has noticeably outpaced inflation. Sarah Coles, head of personal finance at Hargreaves Lansdown, noted that this wage-inflation gap is giving households more disposable income. However, she warned that sustained wage growth might delay rate cuts if it drives inflation higher.
The UK’s unemployment rate edged up to 4.4%, with job vacancies continuing their gradual decline, dropping 2.9% to 812,000. Although vacancies remain above pre-pandemic levels, businesses are facing growing challenges. Recruitment firm Manpower UK highlighted that firms are offering high salaries for specialized roles in engineering, IT, and artificial intelligence. However, many employees are hesitant to switch jobs during uncertain times.
Challenges for Businesses and Workers
Businesses are grappling with increased costs, including tax hikes, higher minimum wages, and reduced relief on business rates. These factors, combined with economic stagnation, have raised concerns about firms’ ability to fund pay rises and create jobs. Petra Tagg from Manpower UK noted that employers are focusing on retaining skilled workers amid a tight labor market.
Chancellor Rachel Reeves’ decision to implement £40 billion in tax rises, including higher National Insurance rates, has added pressure on businesses. Despite these challenges, Rob Wood, chief UK economist at Pantheon Macroeconomics, observed that signs of a sharp labor market downturn remain minimal, though the market is loosening gradually.
Looking Ahead
While regular pay grew annually by 5.6% between September and November, its real increase, factoring in inflation, was 3.4%. The Resolution Foundation described 2024 as the best year for wage growth since 2005. However, concerns persist that rising costs might push businesses to cut staff or limit wage increases later in the year.
Worker shortages in sectors like engineering and IT continue to impact the economy. These shortages can boost wages as employers compete for talent but may also slow economic growth. Liz Kendall, Work and Pensions Secretary, emphasized the need to boost employment and improve living standards, highlighting efforts to reform Jobcentres and support young people in employment or education.
As wages rise, disposable income increases, potentially driving up consumer spending and fueling inflation. This delicate balance will remain a key focus for policymakers and businesses in the coming months.
