Wages are continuing to grow at a faster rate than inflation, with regular pay (excluding bonuses) rising by 7.7% in the three months to September.
It marks the strongest rise in pay when adjusted for inflation in two years. Inflation was 6.7% in September.
Pay growth for the private sector was 7.8%. For the public sector, it was lower, at 7.3%, but this still represents the highest regular annual growth rate since comparable records began in 2001.
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Annual wage growth including bonuses for the whole workforce was 7.9%. This is affected by Civil Service one-off payments made during the summer.
According to the Office for National Statistics (ONS), the UK’s unemployment rate between July and September remained steady at 4.2%, while the employment rate dropped by 0.1 points to 75.7%.
However, there are signs the jobs market is starting to weaken. The 7.7% figure is slightly down on the June to August period, when wages grew by 7.8%.
Looking at the data on a quarterly basis, total pay growth has dropped from 8.4% in the second quarter of 2023 to 7.9% in the third quarter. This is partly due to one-off payments to parts of the NHS workforce in June no longer being reflected in the Q3 data.
The number of job vacancies is also continuing to fall. Between August and October, the estimated number of vacancies in the UK fell by 58,000 to 957,000. This was the 16th consecutive period of decline.
“The UK jobs market is showing signs of softening, with employment on the decline, unemployment holding at 4.2%, and vacancies falling to 957,000 in the three months to October, as employers become increasingly anxious about hiring amid uncertain economic conditions,” comments Alice Haine, personal finance analyst at the investment platform Bestinvest.
“With economic growth stagnating in the third quarter, recession talk is back in the air making it a worrying time for workers.”
The chancellor, Jeremy Hunt, sounded a more positive note about the ONS data, and promised more labour reforms in next week’s Autumn Statement.
"It’s heartening to see inflation falling and real wages growing, keeping more money in people’s pockets,” he said. “The Autumn Statement will set out my plans to get people back into work and deliver growth for the UK.”
According to the government, there were 30.2m employees on payrolls in October, a record high and 1.2m above pre-pandemic levels.
What does this mean for inflation?
Inflation remained unchanged at 6.7% in September, but this is still way above the government's 2% target.
The next round of inflation figures will be released tomorrow (15 November).
“Inflation is expected to drop below 5% for the first time in two years when the October figures are released on Wednesday – delivering a boost to Prime Minister Rishi Sunak who made a pledge in January to halve inflation by the end of the year,” notes Haine.
She adds: “With interest rates remaining at 5.25% since August, there is growing optimism the worst of the cost-of-living crisis is now in the rear-view mirror, however borrowing costs remain high and households gearing up for a better 2024 should continue to budget their finances carefully.”
What does it mean for interest rates?
The slowdown in wage growth increases the chances that interest rates will remain at 5.25%, and start to be cut in the first half of the year.
According to the research consultancy Pantheon Macroeconomics, today’s data could pave the way for interest rate cuts from May. It predicts that rates could fall by 75 basis points over the course of 2024.
However, Capital Economics expects wage growth to fall only slowly, meaning the Bank of England won’t start to trim rates until late next year.
In terms of the Bank’s next meeting on 14 December, the consensus is interest rates will be held again at 5.25%.
What’s the outlook for unemployment?
The unemployment rate stayed roughly unchanged in the July-September period, at 4.2%. However, it has risen over the past year, and it’s above pre-pandemic levels.
Sarah Coles, head of personal finance at the wealth manager Hargreaves Lansdown, says there’s more bad news to come.
She comments: “The Bank of England is forecasting for the picture to deteriorate in the coming months, predicting unemployment rising to 4.3% in the last three months of this year, hitting 4.7% a year later, 5% the year after that and 5.1% by the last three months of 2026. This isn’t just higher than it previously expected, the rises are expected to go on for longer too.”
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