Wage growth in the UK hit 5.6% in the three months to March 2025, down from the previous quarter where growth was 5.9%.
When including bonuses, wage growth was marginally lower, at 5.5%, and remains slower than in the previous quarter, according to data released by the Office for National Statistics (ONS).
The sectors that showed the strongest annual growth rates were the wholesaling, retailing, hotels and restaurants sector (where pay grew by 7.4%), and the construction sector (where pay grew by 6.4%).
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Unlike last quarter, the growth originated in almost equal measure from the public and private sectors, where pay grew by 5.5% and 5.6% respectively.
Despite average earnings growing slower than in the last quarter of 2024, wage growth continues to outpace inflation as real terms wage growth sits at 1.8% excluding bonuses, and 1.7% including bonuses.
The Bank of England will be looking carefully at this new data as it assesses the outlook for inflation, which it expects could reach around 3.75% by the end of the year before falling back to the 2% target at the start of 2026.
As a disinflationary pressure, slowing wage growth will aid the bank’s ambition to lower interest rates “gradually and carefully”. The MPC has cut rates twice already in 2025 – by 25 basis points in February, and then in May when it also lowered them by 25 basis points to 4.25%.
The Bank of England anticipates that wage growth will continue to slow as the year progresses.
Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, said slowing wage growth was not “the best news for consumers grappling with high living costs,” but noted it was “comforting” that wages were still rising faster than inflation.
“This means pre-tax headline incomes are stretching further than they did 12 months ago, although households would be wise to adopt a cautious approach to their personal finances for now,” she said.
What about the jobs market?
More labour market data published by the ONS shows that employers cut jobs for the 34th consecutive quarter in February to April. This represents a fall of 5.35% or 42,000 jobs.
Looking at annualised figures, the latest data shows that the total estimated number of vacancies was down a staggering 14.7%, or 131,000, in February to April 2025 from the level of a year ago.
The latest figures also show that vacancies were down 34,000 (4.3%) from their January to March 2020 level, before the Covid-19 pandemic.
The reason for this fall could be in part because of extra business costs introduced in chancellor Rachel Reeves’ Autumn Budget. These included an increase in employer National Insurance contributions and a rise in the national minimum wage.
At the same time, the headline measure of unemployment rose to 4.5% in the first quarter of 2025, up from 4.4% in Q4 2024, according to the ONS.
Sarah Coles, head of personal finance at Hargreaves Lansdown said that not only does the labour market look to be in bad shape, there appears to be “some telltale signs that the future may not be desperately healthy”.
She said rising unemployment and a prolonged fall in the number of vacancies “means we can’t necessarily take job security and wage rises for granted in the coming months”.
To combat this, Coles said consumers should make sure to top up their emergency savings net with three to six months worth of essential spending in an easy access savings account.
“A third of people are still falling short, so if your wages have risen a little more than your spending, now is the time to consider putting more aside for the future, just in case,” she added.
Is the UK at risk of stagflation?
With turbulence in the jobs market and rising unemployment, fears of stagflation have been stoked among some analysts.
Stagflation is an economic situation where a country has very low or negative economic growth at the same time as high inflation and high unemployment.
Some economists have worried that the UK is at risk of entering into this state for some time now as economic growth has been anaemic for years, and inflation has remained persistently above the Bank of England’s 2% target.
Now, with news that unemployment is on the rise and that vacancies are falling, the final aspect of the woeful trifecta could soon be fulfilled.
On the other hand, while rising unemployment is never good news and should be monitored, it is hardly out of control at the moment.
Similarly, though inflation is above the 2% target, the Bank of England has forecast that it will get back under control at the start of 2026.
