Pay growth slowing – what it means for businesses

There are further signs that wage growth in the UK is starting to ease.

The latest figures from the Office for National Statistics show that average earnings (excluding bonuses) rose by 3.8% in the three months to January, down from 4.2% in the previous period. That makes it the slowest rate of pay growth in more than five years.

Although growth is slowing, wages are still increasing slightly faster than inflation, which stood at 3% in January.

The wider labour market

The overall labour market remains relatively stable.

• Unemployment is at 5.2%, close to a five-year high
• The number of people on payrolls increased by around 20,000 in February, bringing the total to 30.3 million

So while there are signs of softening, it’s not a sharp shift.

Public vs private sector pay

One area where the difference is more noticeable is between sectors.

• Public sector pay growth: 5.9%
• Private sector pay growth: 3.3%

This gap has been a consistent theme, and it continues to affect recruitment and retention in some industries.

Hiring and vacancies

Job vacancies have remained broadly steady.

Early estimates suggest a small decline of 6,000 roles, leaving around 721,000 vacancies in the three months to February.

In practice, that points to a labour market that is cooling slightly rather than contracting.

What this means for interest rates

These figures come just ahead of the next decision from the Bank of England.

There had been some expectation of a rate cut, but that now looks less likely.

Rising fuel and energy costs - linked to ongoing tensions in the Middle East - have increased the risk of inflation picking up again. That makes it more likely that borrowing costs will be held steady for now.

A practical view

For businesses, this creates a slightly mixed picture.

On one hand, slower wage growth can ease some pressure on costs. On the other hand, inflation risks and interest rates remaining higher for longer continue to affect planning and investment decisions.

It’s not a dramatic shift - but it’s another sign that conditions are changing gradually rather than quickly.

Final thought

The key takeaway is that while pay growth is slowing, the wider environment is still uncertain.

Costs, wages and borrowing conditions are all moving at the same time, just in different directions.

For most businesses, that makes it more important to keep a close eye on margins, staffing costs and forward planning over the coming months.

If you’d like to talk through how this might affect your business, feel free to get in touch.