Wage growth in the UK has risen to 5.6%, up from 5.2%, marking a notable rebound from the 3.9% low recorded in August 2024.
However, while rising wages continue to outpace inflation, market analysts have warned of potential inflationary pressures and economic headwinds.
Pierre Roke, an analyst at Validus Risk Management, said: “Today’s strong wage growth is unlikely to prevent the Bank of England from cutting rates in February, but if it persists, rates could rise above recent peaks.”
He noted a growing divergence between market expectations and the Bank of England’s signals, adding that inflation concerns — driven by higher wages and external factors such as US policy changes — could force the government to take decisive action, including tax hikes or spending cuts.
Sarah Coles, head of personal finance at Hargreaves Lansdown, pointed out that “wages outpaced inflation again, running hotter than they have for three and a half years”.
She noted that the gap between pay and inflation has given households “a smidge of extra wiggle room”, with average disposable income rising to £136 per month, or £726 among the highest earners.
However, she cautioned that while higher wages are currently boosting savings and short-term resilience, “that feeling may not last” if inflationary pressures persist, potentially delaying interest-rate cuts.
The impact on employment is another growing concern.
Richard Carter, head of fixed interest research at Quilter Cheviot, said: “Despite the continued strain of many economic headwinds, the UK labour market had been holding relatively steady. However, it appears the cracks are starting to appear.”
The unemployment rate has edged up to 4.4%, surpassing previous estimates, while vacancies have fallen by 24,000, indicating a slowdown in hiring.
Carter warned that upcoming increases to employer national insurance contributions may weigh heavily on businesses, prompting them to reduce hiring and cut costs.
Coles also echoed these concerns, noting that “uncertainty around the Budget and rising employer taxes could be playing a part in keeping a lid on employment”.
She warned that businesses might face further pressure to reduce staffing and wage growth as they adjust to higher costs in 2025.
Meanwhile, Patrick O’Donnell, senior investment strategist at Omnis Investments, observed that while unemployment is rising “slowly”, wages remain elevated, preventing the BoE from cutting rates more aggressively.
He noted that, despite recent market optimism, the outlook remains uncertain.
Who is surprised? The full effects of the budget have yet to be felt and you don’t need a crystal ball to see the probability of further unemployment. Not to mention the threat of the Orange Horror.
No Labour government (since the minority one in 1924) has EVER left office with unemployment lower than when it started. Labour invariably destroys private enterprise, private sector jobs and private wealth – replacing them with a bloated public sector, which ultimately runs out of other people’s money to fund it. In Labour’s case, past performance is the most reliable guide to the future.