UK Pay Growth Accelerates, Raising Fresh Challenges for Bank of England

Wage growth in the UK accelerated in the final months of 2024, providing relief for workers but complicating the Bank of England’s efforts to manage inflation.

According to new data from the Office for National Statistics (ONS), total pay—including bonuses—rose 6% year on year in the final quarter, up from 4.4% in the previous three months. Regular pay, which excludes bonuses, increased 5.9%, compared to 4.9% in the preceding quarter. Crucially, both figures outpaced inflation, leading to a 3.4% rise in real wages.

While the increase offers a boost to households, it also presents a dilemma for the Bank of England, which cut interest rates earlier this month but remains wary of persistent inflationary pressures.

Wage Growth Versus Inflation Risks

The ONS highlighted that pay growth has now risen for three consecutive periods, with increases recorded in both the public and private sectors.

“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 report noted.

The figures suggest that despite previous fears of a slowdown due to high borrowing costs, strong demand for labour and low unemployment have kept earnings rising.

Mixed Labour Market Trends

The broader labour market data painted a mixed picture.

• Employment for those aged 16 to 64 inched up to 74.9%.
• Unemployment rose slightly to 4.4%, higher than a year ago.
• The economic inactivity rate fell to 21.5%, indicating that some individuals have re-entered the workforce.
• The number of people claiming unemployment-related benefits in January 2025 rose to 1.75 million, an increase both monthly and annually.

These figures suggest that while the labour market remains resilient, there are signs of softening, particularly with a rise in unemployment claims.

Pressure on the Bank of England

The Bank of England had raised interest rates to a 16-year high before cutting them by 25 basis points this month to 4.5%. Further rate cuts are expected later in 2025.

However, if wage growth continues to outpace inflation, the Bank could face renewed pressure to pause or slow rate reductions to avoid fuelling price rises.

With the UK economy balancing between growth and inflation risks, policymakers will closely watch the next set of wage and employment data before making their next move.