Wage growth remained strong at 5.8% in the three months leading up to January, according to official figures, adding pressure on the Bank of England to maintain borrowing costs as it announces its interest rate decision today.
Although pay growth saw a slight decline, it continued to outpace inflation, indicating that employers are still offering competitive salaries to attract skilled workers. The drop to 5.8%, including bonuses, aligned with economists’ expectations and represented a 3.1% increase after adjusting for inflation over the quarter. Wage growth has now exceeded 4% for three consecutive years, marking the longest period of sustained increases since records began in 2001.
Bank of England policymakers reviewed this data on Wednesday while deliberating on interest rate cuts, following an uptick in unemployment and near-zero economic growth over the past six months. However, with wage growth remaining elevated, they are expected to keep interest rates at 4.5% until their next meeting in May.
Unemployment remained steady at 4.4% in January, though the Office for National Statistics (ONS) cautioned that its labour force survey might undergo significant revisions in the coming months. Since the pandemic, the ONS has struggled with survey responses due to a decline in participant numbers.
Suren Thiru, economics director at ICAEW, noted that declining business confidence has resulted in a sluggish job market. He described high wage growth as a “double-edged sword”—while it supports consumer spending, a key driver of economic growth, it may also slow interest rate cuts by fueling inflation concerns.
Thiru also warned that the upcoming increase in employers’ national insurance could lead to moderate job losses and weaker wage settlements.
Despite this, recent business surveys have indicated a modest recovery in job demand. Industries that faced setbacks last year, such as IT services and construction, have seen an uptick in job postings, according to a labour market tracker by the Recruitment and Employment Confederation.
Additionally, a survey by ManpowerGroup revealed that while business confidence remains fragile ahead of tax hikes next month, demand for workers has stabilized.
From next month, employer national insurance contributions will rise, generating £25 billion for the Treasury, while the national minimum wage for workers aged 21 and over will increase by 6.7% to £12.21 per hour.
Economists predict that above-inflation wage increases will drive higher household spending this year. A British Retail Consortium survey also found that public confidence in both the economy and personal finances has improved.
