Wages across the UK are rising faster than inflation, offering a boost to workers but raising concerns for businesses ahead of upcoming cost increases.
According to the Office for National Statistics (ONS), wages grew by 3.4% in real terms between October and December 2024 compared to the same period the previous year. The latest data shows that annual pay growth, excluding bonuses, reached 5.9%, up from 5.6% in the previous quarter.
Despite the strong wage growth, the UK’s unemployment rate remained at 4.4%, though the ONS has advised caution when interpreting the figures due to low response rates in its employment survey.
Businesses Warn of Cost Pressures
While workers are benefiting from rising wages, businesses are warning of potential cutbacks in hiring and investment. Employers are bracing for increased costs in April, when National Insurance contributions will rise, the minimum wage will increase, and business rates relief will be reduced.
The private sector saw stronger wage growth, with earnings rising 6.2%, compared to 4.7% in the public sector. However, some economists predict a gradual slowdown in wage growth in the coming months.
“There is a limit to how much additional cost businesses can absorb without employment and investment opportunities being damaged,” said Jane Gratton, deputy director of Public Policy at the British Chambers of Commerce.
Yael Selfin, chief economist at KPMG UK, echoed these concerns, suggesting hiring intentions among businesses had weakened significantly, particularly in the hospitality and retail sectors, which employ a high proportion of low-wage workers.
Interest Rate and Inflation Outlook
The latest wage figures will be closely monitored by the Bank of England, which recently cut interest rates to 4.5% from 4.75%.
Rob Wood, an economist at Pantheon Macroeconomics, said the central bank would likely remain cautious on further rate cuts, given the wage growth figures.
Meanwhile, the UK’s inflation rate stood at 2.5% in December, but analysts predict an uptick due to higher energy and water bills. If businesses respond to rising costs by raising prices, it could fuel further inflationary pressures.
Job Vacancies Declining, But Payroll Numbers Hold Steady
The number of job vacancies has fallen by 110,000 (11.8%) over the past year, according to the ONS, though vacancies remain above pre-pandemic levels.
However, the number of workers on UK payrolls rose by 21,000 in January, bringing the total workforce to 30.4 million.
Chris Eldridge, chief executive of Robert Walters UK, Ireland, and North America, said businesses are adopting a wait-and-see approach as they navigate the early months of 2025.
“The first big test will come at the end of the quarter in March, when we see the National Insurance changes kick in and the impact of the Employment Rights Bill,” he added.
As businesses and policymakers assess the economic landscape, the challenge will be balancing wage growth, inflation control, and employment stability in the months ahead.
