Pay growth in the UK has decelerated sharply, reaching its lowest level in more than five years, according to the latest Office for National Statistics (ONS) figures. Average earnings, excluding bonuses, increased by 3.8% in the three months to January, down from 4.2% in the prior period.

Labour Market Remains Resilient

Despite the slowdown in wage growth, the labour market shows stability. The unemployment rate held steady at 5.2%, near a five-year high, while payroll numbers rose by approximately 20,000 in February, reaching 30.3 million. Job vacancies dipped slightly by 6,000, totalling 721,000 in the three months to February.

Public sector pay continues to outperform the private sector, with annual average earnings growth at 5.9% compared to 3.3% in private businesses over the same timeframe.

Inflation and Policy Implications

Although wage growth exceeds January's 3% inflation rate, external pressures are mounting. Rising fuel and energy costs, driven by escalating Middle East tensions, heighten inflation risks. These factors make a Bank of England interest rate cut unlikely, with policymakers poised to maintain steady borrowing costs to counterbalance slowing wages and resurgent inflation.

This data arrives amid broader economic signals, including stronger-than-expected GDP growth of 0.5% in February, though forecasts for 2026 have been downgraded to around 1% due to geopolitical uncertainties.