UK Wages Continue to Outpace Inflation – But Will It Last?

UK Wages Continue to Outpace Inflation, But Will It Last? - Zomi Wealth
UK workers have seen their wages continue to rise faster than inflation, providing a boost to take-home pay. However, businesses are warning of cost pressures ahead, with concerns that rising employment costs could slow wage growth in the coming months.

Wages Rising Faster Than Inflation

According to the Office for National Statistics (ONS), wages, after accounting for inflation, rose by 3.4% between October and December 2024 compared to the same period in the previous year.
Without adjusting for inflation, average pay growth (excluding bonuses) was 5.9%, up from 5.6% in the previous quarter. This is good news for workers, as it means that wages are increasing at a faster pace than the cost of living.
Here’s how different sectors performed: 
• Private sector wage growth: 6.2%
• Public sector wage growth: 4.7%
The UK’s inflation rate was 2.5% in the year to December 2024, meaning real wages are still rising. However, with energy and water bills expected to increase, inflation could rise again, potentially squeezing household budgets.

How Will Rising Business Costs Impact Wages?

While the latest wage data is positive, businesses are facing higher costs from April 2025, which could put a strain on future pay rises. Employers have flagged concerns over:
National Insurance Increases
Employers will now pay 15% NI on salaries above £5,000, up from the current 13.8% on earnings above £9,100.
Minimum Wage Hikes
The National Minimum Wage is set to rise, particularly impacting sectors like hospitality and retail that employ a large number of lower-wage workers.
Reduced Business Rates Relief
Some businesses will see tax reliefs on business rates reduced, adding further financial strain.
With these additional costs, some employers are considering:
– Slowing down hiring
– Freezing or limiting pay increases
– Raising prices to cover increased costs
A recent survey of UK employers suggested that price rises could be on the horizon, which could, in turn, lead to higher inflation.

Unemployment and Job Market Outlook

Despite the wage growth, the UK unemployment rate remained at 4.4%. However, the ONS has cautioned that its employment survey response rates are low, meaning these figures should be treated carefully.
Other key findings include:
– Vacancies fell by 110,000 (11.8%) year-on-year, but still remain above pre-COVID levels.
– The number of workers on payrolls increased by 21,000 in January, bringing the total to 30.4 million.
However, experts warn that hiring intentions have “weakened significantly”, particularly in retail and hospitality, which employ a high proportion of low-wage workers.
Chris Eldridge, CEO of Robert Walters UK & North America, said that the first big test will come at the end of Q1 when businesses feel the impact of National Insurance changes and potential updates to the Employment Rights Bill.

What’s Next for Interest Rates?

The Bank of England recently cut interest rates from 4.75% to 4.5%, but policymakers are still watching wage growth closely.
A slight rise in private sector wages could mean the Bank remains cautious about further rate cuts in the short term. If wage growth remains strong, it could slow down the pace at which interest rates are reduced.
Rob Wood, chief economist at Pantheon Macroeconomics, said that while interest rate cuts are expected, policymakers will be “gradual and cautious” in their approach.

What Does This Mean for Workers and Businesses?

For now, workers are seeing their wages rise faster than inflation, boosting spending power. However, with rising costs hitting businesses, the long-term sustainability of these wage increases is uncertain.
For Employees:
✅ Pay packets are growing in real terms – for now.
⚠️ Job security could become a bigger concern if businesses cut back on hiring. 
❗ Inflation may rise again, meaning future real wage gains could slow.
For Employers:
⚠️ Cost pressures are increasing from higher National Insurance and wage bills.
📉 Hiring slowdowns are likely in affected industries.
🔄 Price rises could be passed onto consumers, fuelling inflation risks.

Final Thoughts:

While the latest figures offer good news for workers, businesses are preparing for a tougher landscape ahead. Rising employment costs could lead to job cuts, slower hiring, and potential price increases, which might limit future wage growth.
With interest rate decisions and further economic policies still unfolding, both employers and employees should keep a close watch on the evolving job market in 2025.

Sources:

https://www.bbc.com/news/articles/c4gwgpjgl5zo

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