![Escalators busy with passengers leading to and from ticket barriers at Paddington Station on the Elizabeth line.](https://media.guim.co.uk/b7f76d3ea4a18da1d4a917907c9eab30b2c3772b/0_186_4000_2400/1000.jpg)
Pay growth slowed less than expected in December, prompting predictions the Bank of England could start cutting interest rates later than previously expected.
Earnings growth, excluding bonuses, fell only modestly to 6.2% in October to December 2023 from a revised 6.7% in the previous three months, as workers continued to bid up their wages amid skills shortages and a record number of people with long-term sickness.
City traders, who had expected regular pay increases to drop more sharply to 6%, trimmed their forecasts of how much the Bank would cut rates this year.
Policymakers at the Bank have signalled that pay rises will have to moderate before it cuts interest rates, otherwise rate cuts would risk allowing inflation to return later in the year.
UK rate futures, which are used to gauge the likelihood of interest rate cuts, predict a reduction of just 0.69 percentage points this year, down from expectations last year that the central bank was poised to make cuts totalling 1.3 percentage points in 2024.
George Buckley, the chief UK economist at Nomura, said a first cut in March or May, as financial markets previously expected, was now unlikely and that he was forecasting a delay until August.
Office for National Statistics (ONS) figures on Wednesday showed annual growth in regular pay rises including bonuses was 5.8% in October to December 2023. City traders had expected this figure would fall to 5.6%.
After wages were adjusted for inflation, the ONS said workers enjoyed a sixth month of real wage increases. Total pay rose on the year by 1.6% above the consumer prices index and regular pay rose on the year by 1.9% in October to December 2023.
The Bank’s decision on when to cut rates will be made more difficult by a fall in job vacancies for an 18th consecutive month and a slowdown in the growth of employment, which indicate the labour market weakened in the last months of 2023.
A range of business surveys have shown annual pay rising in sectors with severe skills shortages. The jobs website Indeed said its employment tracker found that lower-paid categories such as childcare, cleaning and retail were among the most affected.
It said many of these sectors were increasing pay before an increase of almost 10% in the national living wage due in April.
Jack Kennedy, senior economist at Indeed, said: “Elevated pay pressures in this segment of the labour market don’t seem likely to abate soon.”
City workers and staff in the business services sector, which includes accountants, marketing executives and lawyers, saw their average pay growth fall below 7% for the first time in almost two years.
In a sign that pay growth will slow further this year, a pay survey by the Chartered Institute of Personnel and Development found that employers were pencilling in 4% in the private sector and 3% in the public sector for the year ahead.
Meanwhile, job vacancies declined to 932,000 in the three months to January, the lowest since mid-2021.
Liz McKeown, director of economic statistics at the ONS, said there were further signs of labour market weakness in the trends of employment growth and sickness rates.
“It is clear that growth in employment has slowed over the last year. Over the same period the proportion of people neither working nor looking for work has risen, with historically high numbers of people saying they are long-term sick,” she said.
The ONS said it estimated 2.8 million people between 16 and 64 were not in the workforce because of ill health, a higher number than previously thought.
The Health Foundation thinktank said the situation appeared to be getting worse. “With 688,000 more people out of the workforce since before the pandemic, 6.6% of 16- to 64-year-olds are now economically inactive for health reasons, a record high since 1993,” it said.
Jake Finney, an economist at the business advisory firm PwC UK, said the consecutive falls in the vacancy rate showed the heat was being taken out of the labour market.
“However, the lingering concern for the Bank of England will be that the labour market has not cooled sufficiently to achieve a sustainable return to the 2% inflation target. This remains one of the key barriers to the base rate cut in May that markets are currently expecting,” he said.
Jobs data has proved difficult to read since last autumn when the ONS suspended the labour force survey, which was used to measure key jobs market indicators such as employment and unemployment.
The chancellor, Jeremy Hunt, said he welcomed the rise in real incomes and low unemployment.
“It’s good news that real wages are on the up for the sixth month in a row and unemployment remains low, but the job isn’t done. Our tax cuts are part of a plan to get people back to work so we can grow the economy – but we must stick with it.”
The TUC general secretary, Paul Nowak, said the government’s efforts fell short of what was needed to reduce long-term sickness rates and raise wages in real terms to a level seen in 2008.
“Average pay is still worth £12 a week less than before the financial crisis 16 years ago and more than a million people are on zero-hours contracts. The Conservative legacy is low pay, ill health and more job insecurity,” he added.