Market News

BY  Vicky McKeever · Business reporter

UK pay growth rose once again in the final quarter of last year, adding to concerns about persistent inflationary pressures.

UK average weekly earnings climbed by 5.9% in the three months to December on an annual basis, up from 5.6% in the previous three months, according to data from the Office for National Statistics. Wage growth continued to outstrip inflation, which unexpectedly fell in December but was still above target at 2.5%.

Meanwhile, annual average earnings – adjusted for inflation – were up 2.5% from the previous year, marking the fastest growth since the summer of 2021.

ONS director of economic statistics Liz McKeown said: "Growth in pay, excluding bonuses rose for a third consecutive time, with increases seen in both the private and public sector. After taking account of inflation, real pay growth also increased slightly.

"The number of employees on payroll was broadly unchanged in the last three months of the year, continuing a medium-term trend of slowing growth.

"The number of vacancies also continued to fall in the latest quarter, albeit slowly, with the total number remaining a little above its pre-pandemic level."

The employment rate stood at 4.4% in final quarter of last year, which was unchanged from the three months to November.

The number of payrolled employees fell by 14,000 between November and December, following a fall of 32,000 between October and November, though this figure was up by 44,000 for the whole year.

There were 819,000 job vacancies from November to January, according to the ONS, down 9,000, from the August to October period.

Richard Carter, head of fixed interest research at Quilter Cheviot, said that the "slight acceleration in earnings growth may complicate the Bank of England’s decision-making, as it must balance concerns over a slowing economy with the risk that strong pay growth could sustain consumer spending and slow disinflation.

Read more: Taxpayers to hand over £130bn to Bank of England in ‘stealth subsidy’

“The upcoming changes to employer national insurance contributions are also expected to weigh on hiring decisions, and today’s data suggests businesses may already be adjusting their workforce strategies to manage higher costs.

"If economic conditions continue to deteriorate, we could see wage growth moderate more sharply, but at the cost of rising job losses."

A number of UK businesses have warned about the impact of increases to employer national insurance contributions and in the national minimum wage, which were announced in the autumn budget.

“This morning’s figures follow last week’s GDP release, which showed the UK economy grew by 0.1% in December 2024, reinforcing concerns that growth is stagnating," Carter said.

"While the UK is not yet in dire straits, today’s numbers indicate that economic momentum is continuing to slow, and the combination of weaker hiring, slowing pay growth, and fading business confidence could push the economy closer to a downturn. The Bank of England will be watching these figures closely as it considers its next steps."

Rob Morgan, chief investment analyst at Charles Stanley, said that a "a deteriorating jobs market and an anaemic growth picture is the uncomfortable scenario facing chancellor Rachel Reeves as she battles to keep to her fiscal rules.

"Higher interest rates and slow growth are eroding the headroom between tax receipts and spending commitments," he said.

"In the absence of taking on more debt or growth, some combination of spending cuts and tax rises will probably be required to balance the equation. All eyes will be on the spring statement next month to see what her next move is."