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Just as economic news starts to sound optimistic, a survey by Incomes Data Research (IDR) reveals many U.K. employers plan to reduce pay raises in 2025.
Nearly two-thirds of the 100 employers surveyed intend to offer smaller pay raises compared to 2024. This is a notable increase from the 53% recorded last year.
The report shows 45% of organizations are looking to implement pay increases ranging from 3% to 4% in 2025. IDR highlights that this trend aligns with easing inflation pressures and a slight reduction in job candidate scarcity.
Reuters reports that this moderation in wage growth is seen as a response to the gradual weakening of inflation, and it could provide some breathing room for employers who have been adapting to the influence of a tighter labor market and rising costs of living.
“Prices for items such as food, as well as mortgages and rents, remain higher than before the pandemic,” IDR senior researcher Zoe Woolacott said. “This maintains pressure on employers to award their workers with a pay rise that compensates them to some extent for the higher cost of living.”
The Bank of England (BoE) is paying close attention to wage trends, especially as it cautiously adjusts its monetary policies. The BoE recently maintained interest rates at 5%, following a rate cut in August.
The BoE’s adjustment follows the Federal Reserve’s highly anticipated interest rate cuts on Wednesday, which reduced the benchmark rate by half a percentage point. Now the Fed is turning its focus to the labor market.
Wage growth is seen as an indicator for the BoE, and the anticipated reduction in pay increases across the U.K. could influence its future decisions regarding the nation’s borrowing costs.
The survey’s findings come at a time when major employers report that the median pay settlement dropped to 4.0% in the three months leading up to July — which is the lowest since August 2022.
Employees may find that pay increases will not fully keep pace with the rising cost of living, and while inflationary pressures may be softening, the persistent high prices of essential goods and housing could mean that many workers will still feel financial strain next year.
This could translate to a more cautious approach to compensation next year and could reinforce employee demand for other benefits such as flexible work opportunities.
