Real Pay Growth at a Two-Year High Amidst Falling Inflation

Main points

• The annual growth rate of average weekly earnings, including bonuses, was 5.6 per cent in the three months to February 2024, while pay growth excluding bonuses was 6 per cent. In real terms, economy-wide total pay increased by 1.6 per cent, its highest level since October 2021
• These figures indicate that wage growth remains high by historical standards, enabling households to achieve real income gains following a period of purchasing power erosion due to high inflation. Real wage growth is expected to bolster the UK economy's recovery from a shallow recession
• Unemployment has risen to 4.2 per cent in the three months to February, its highest level since August 2023, which indicates that the labour market continues to cool and could exert downward pressure on inflation. That said, LFS data remain volatile so should be treated with caution
• Our estimates suggest economy-wide total pay grew by 5.6 per cent in the first quarter of 2024. We expect wage growth rate to continue slowing as the labour market gradually cools in the second quarter, however, the 9.8 percent rise in national minimum wage in April (for those aged 21 and over) may keep wage growth elevated
• Although this is good news for employees, the persistence of high wage growth together with the minimum wage hike means inflation may be stickier than previously thought, leading the Bank of England to remain cautious against an early rate cut

“Today’s ONS figures show that annual growth in average weekly earnings was 5.6 per cent (6 per cent excluding bonuses) in the three months to February. Whilst this figure is above historical norms and prompts caution for the Bank of England regarding interest rate cuts, the rise in the unemployment rate indicates that the labour market continues to cool, which could alleviate inflationary pressures.”

Monica George Michail, Associate Economist