Dan McEvoy
Wage growth in the UK hit 5.9% in the three months to December 2024, up from 5.6% the previous month, meaning more money is going into workers’ pockets, potentially stoking fears of inflation.
Data released by the Office for National Statistics (ONS) shows wages in the UK remain on the rise even as the number of available jobs continues to decrease, with today’s wage growth data being the third consecutive rise.
Average weekly earnings in the UK are now 5.9% higher than last year, climbing to 6% higher when taking into account bonuses, amounting to a real-terms wage growth of 2.5%.
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Much of this growth comes from the private sector, where wages have grown by an average of 6.2%, while public sector pay growth was lower at 4.7%.
The ONS says that when looking at broad sectors within the economy, there is not substantial differentiation in the amount pay has grown, apart from when comparing the private and public sectors.
The new data marks another quarter where wages have beat inflation, which is currently 2.5%, but is expected to rise to 2.8% in the ONS’ January inflation report.
This is a situation the Bank of England will be monitoring very closely as wage growth is an upwards inflationary pressure. The central bank has already published dreary estimates that say inflation could top out at 3.7% by the end of 2025 before falling back to around 2% in 2026. With more people having more money to spend, demand could outstrip supply and potentially raise prices.
Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “Wages have outpaced inflation again, easing the pressure on budgets and making life a little more comfortable.
“However, we can’t afford to relax just yet, because wage hikes raise the spectre of inflation, which could be lurking around the corner, ready to ambush the unwary.”
The number of vacancies in the UK has fallen by 9,000 in the last quarter as firms are against hiring more staff, a new set of labour market data released by the ONS on Tuesday, 18 February, shows.
Meanwhile, the unemployment rate now sits at 4.4%, up from last year and last quarter.
Economists and analysts watch the strength of the UK labour market closely as a signifier of the health of the UK economy. Wage growth data as well as related labour statistics such as the UK employment rate are key indicators of economic criteria like business growth, and also feed directly into inflation.
As such, the Bank of England pays close attention to these readings when it sets interest rates.
If wage growth data, as well as the stagnant labour market, turn out to be too much of an inflationary concern for the Bank of England, they may forgo more aggressive base rate cuts when the MPC next meets in March. This being said, most analysts are still expecting further cuts this year.
Danni Hewson, head of financial analysis at AJ Bell, said: “Today’s surprisingly robust figures are already having an impact on market expectation for future interest rate cuts, with the MPC carefully monitoring wage growth figures and trying to balance strength there against dismal economic growth.
“Central bankers will be hyper aware of the tightrope they walk and the lag between their action and the impact on households.”
How does wage growth impact inflation and interest rates?
Wages grew faster than the rate of price increases in the three months to December 2024. In theory that means that the amount of free income has increased.
Policymakers will be wary of this, because more money in the system could push prices up. With inflation sitting at 2.5%, above the Bank of England’s 2% target rate, it could make the central bank’s Monetary Policy Committee (who set interest rates) more reluctant to cut interest rates when it next meets in March.
On the other hand, rising unemployment would serve as a counterweight to this, implying the need for looser monetary policy in order to increase hiring activity.
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