UK pay awards rise to 3.4% in three months to May, IDR survey shows

British employers' average annual pay awards rose to a median of 3.4% in the three months to May, up from 3.2%, primarily driven by a 9.7% increase in the National Living Wage in April that boosted pay for lower-paid workers, particularly in the services sector. This also saw the proportion of private sector employers offering settlements over 6% jump to 19% from 12%. This upward trend in pay awards presents a concern for the Bank of England, which is closely monitoring inflation pressures and had previously forecast a slowdown in pay growth, despite official figures showing a recent deceleration to 5.2% in the three months to April.

Analysis

The latest Incomes Data Research (IDR) survey indicates an acceleration in UK pay awards, with the median settlement rising to 3.4% in the three months to May from 3.2% in the period ending April. This uptick is primarily attributed to the 9.7% increase in the National Living Wage effective April, which has notably impacted the private services sector and driven a sharp rise in the proportion of private sector pay deals exceeding 6%, from 12% to 19%. This development presents a hawkish data point for the Bank of England, directly challenging its forecast for a slowdown in pay growth and fueling concerns about persistent domestic inflation pressures. The BoE's projection for inflation to peak at 3.7% and remain elevated near 3.5% through 2025 appears more credible given this wage pressure. However, this survey data contrasts with official figures for the three months to April, which showed a sharp deceleration in wage growth to 5.2%, creating a mixed signal for policymakers and investors regarding the true momentum of wage inflation.

Key Decisions for Investors

• Investors should anticipate the Bank of England will maintain a hawkish stance, as this forward-looking pay settlement data suggests underlying inflationary pressures may be more persistent than previously expected, potentially delaying the timeline for interest rate cuts.
• Consider underweighting UK gilts and other duration-sensitive assets, as sustained wage growth pressures could keep yields elevated and weigh on fixed-income returns.
• Closely monitor upcoming official wage and inflation data to reconcile the conflicting signals between the IDR survey and the prior official statistics, as confirmation of accelerating wage pressures would reinforce the case for a higher-for-longer rate environment.