Almost half of UK companies are preparing to increase prices in response to higher wage and employment costs, according to new data from the Office for National Statistics (ONS), underscoring the risk of stubborn inflationary pressures across the economy.

The latest fortnightly "Business insights and impact on the UK economy" survey, which covers businesses with 10 or more employees, found that 44% of respondents expecting a rise in employment costs over the next three months plan to adapt by raising the prices they charge. The ONS said this was the single most commonly cited response to higher labour-related expenses, ahead of cutting staff numbers or reducing hours worked.

Employment costs feeding inflation risk

The survey result matters for policymakers because it provides an early indication of how firms are likely to respond to the combination of higher minimum wages, rising pay settlements and increased non-wage costs such as employer national insurance contributions and pension obligations. If businesses pass a significant share of those higher costs on to customers, it can slow the pace at which inflation returns to the Bank of England’s 2% target.

According to the ONS, the 44% figure refers specifically to businesses that reported they would need to adapt to future rises in employment costs, rather than to all UK firms, but it still points to a broad-based readiness to protect margins through price increases. A smaller proportion of firms said they would absorb higher costs through lower profits, reduce investment or cut back on other expenditure.

Service-sector businesses, which are generally more labour-intensive, were among the most likely to report that they would respond to higher employment costs by raising prices, while some manufacturing and construction companies highlighted parallel pressures from input costs and financing expenses. The ONS noted that responses varied by industry, reflecting differences in competitive conditions, pricing power and exposure to wage legislation.

Pressure on margins and consumers

The findings highlight the delicate balance facing UK businesses as they manage rising wage bills, softer demand in some sectors and tighter financial conditions following the sharp increase in interest rates over the past two years. Many firms entered 2026 with already-squeezed margins after absorbing earlier surges in energy and raw material costs, leaving them less willing or able to absorb further increases in labour costs without adjusting their pricing.

For households, the prospect of another round of price rises comes at a time when real incomes are only gradually recovering from the erosion caused by the earlier inflation spike. Any renewed upward pressure on prices for goods and services would risk prolonging the cost-of-living strain, particularly for lower-income households that spend a larger share of their budgets on essentials.

Economists said the ONS data would be closely watched by the Bank of England as it considers the timing and pace of any future interest-rate cuts. A pattern of businesses signalling that they will pass on wage and tax increases could make the Monetary Policy Committee more cautious about loosening policy too quickly, for fear of entrenching higher inflation expectations.

Policy backdrop and business sentiment

The ONS survey is part of a regular series launched during the pandemic to track business conditions and expectations across the UK economy. In addition to pricing plans, it covers issues such as trading performance, cash flow, labour shortages and investment intentions.

In its latest release, the ONS reported that many businesses continue to cite labour costs and availability as key challenges, even as some other cost pressures have eased from their peaks. Employers in sectors such as hospitality, health and social care, logistics and professional services have reported difficulties in recruiting and retaining staff at wage levels they consider sustainable, adding to the pressure to raise pay.

At the same time, some businesses expressed concern about policy uncertainty around taxation and regulation, and about how future changes to employment law or benefits may affect their cost base. These factors are feeding into decisions about hiring, investment and pricing for the year ahead.

Sectoral differences and adaptation strategies

While price increases were the most frequently cited adaptation strategy, the ONS data show that businesses are also exploring a range of other responses to higher employment costs. These include seeking productivity gains through technology and process changes, restructuring workforces, and revisiting supplier and customer contracts.

Some large employers reported plans to invest more heavily in automation and digital tools to reduce their reliance on low-wage labour over time, particularly in routine or repetitive roles. Others said they were consolidating operations or rationalising product lines to focus on higher-margin activities, aiming to create more scope to absorb cost increases without passing them on fully to customers.

Smaller and medium-sized firms, which often have less pricing power and thinner financial buffers, indicated that they face tougher choices. A number reported that rising wage bills, combined with higher borrowing costs, were limiting their ability to invest or to expand headcount, raising concerns about the potential long-term impact on growth and productivity.

What it means for the UK outlook

The ONS survey does not directly measure how much prices will rise or in which specific goods and services, but it offers an early signal that wage and employment cost pressures remain a live issue for businesses across the economy. If a large share of firms follow through on plans to increase prices, it could slow the disinflation process that has been underway as energy and goods prices have cooled.

For policymakers, the data underline the importance of monitoring not just headline inflation, but also underlying cost dynamics in the labour market and how firms respond to them. For businesses, the survey highlights the need to balance short-term margin protection against the risk of eroding demand if customers become less willing or able to absorb further price increases.

Investors and lenders are likely to scrutinise corporate earnings, trading updates and guidance over the coming months for evidence of how these pressures are playing out in practice. The ONS has said it will continue to track business responses to changes in employment costs in its regular releases, offering one of the clearest high-frequency windows into how the cost of labour is feeding through to UK prices and growth.