Good news for the UK economy with signs of a slight easing in the cost of living crisis

After a difficult year the UK economy was due some good news - the last month or two has provided it, as signs of a slight easing in the cost of living crisis finally emerged. Inflation fell more than expected to 4.6% in October from 6.7% in September (ONS), real wages increased 1.3% in July to September compared to the previous year, and GfK reported that consumer confidence rose 6 points to -24 in November as optimism rallied in the run up to Christmas.

The big question for many of our clients is what this could mean for salary negotiations in 2024. If inflation is falling and real wages have risen, will businesses be under less pressure to offer inflation-busting salary increases next year in a bid to keep or attract talent?

Demand for skills  

It’s a complicated question and the answer is likely to be nuanced. But while many economists do expect real wage rises to slow next year as higher interest rates continue to impact businesses and inflation cools, this won’t be true across the board. The need for certain skills remains high, and in the markets we serve - accounting, marketing, HR and IT - the laws of supply and demand are likely to trump the effect of falling inflation when it comes to salary negotiations.

“We are in a highly employed market with little churn,” says John Lynes, managing director at the Ashdown Group. “There’s less company-to-company movement for employees, and little job creation. But demand for skills is still high.” Skills such as software development, cyber security and all data centric roles continue to be in short supply, meaning salaries continue to be pushed up.

This is likely to cause particular issues for any companies who are enjoying growth in 2024. As Lynes says: “Quite simply, there isn’t the available talent to satisfy demand. Attracting experienced talent from their current jobs may be costly and slow, with employers having improved their retention strategies as a consequence of the 2022 skills shortage.”

Average annual total pay growth 7.9% in the three months to September 2023

Finance and Business services sector saw an annual increase of 9.4%

Squeezed incomes

In addition to this, employees remain highly focused on the cost of living, their squeezed incomes, and the ongoing impact of the last two years. The economic data might be looking more positive, but the reality for many is that things still feel expensive and interest rates – held for a second month by the Bank of England at 5.25% in November - are still much higher than they were two years ago.

In 2024, another 1.6 million households will see their low fixed rate mortgage come to an end and will be required to move to a higher rate, impacting their disposable income; the fall in inflation, meanwhile, has been attributed to lower energy costs rather than a fall in prices across the board. Food inflation, for instance, is still in double digits at 10.1%.

“People are still under pressure,” says Lynes. “If people move jobs, it’s likely to be salary that shifts them because it has the biggest impact on squeezed income. Last year it might have been flexibility. Hybrid working is now almost a given and addressing the cost of living through higher salaries has taken over as the main reason for wanting to move.”

He predicts that the combination of high employment, the high cost of living and high demand for certain skills will maintain salary increases at around 6% or 7% in 2024. “Unless there’s an increase in skills availability, a reduction in interest rates and cost of living, salary inflation is likely to stay high.”

Salary negotiations

These factors can already be observed in the ONS data, which shows wages rising more strongly in highly skilled sectors. While average annual total pay growth (without adjusting for inflation) was 7.9% in the three months to September 2023, the finance and business services sector saw an annual increase of 9.4%. “Demand for skills and people will trump falling inflation when it comes to negotiations,” Lynes says. “Salary negotiation will become quite a big deal for employees next year.”

Increased productivity

As salaries continue to climb, businesses will increase their expectations around productivity, requiring more of employees. Plus, Lynes says, businesses will look for other ways to improve efficiency and save money. “We’re likely to see more automation technology being used and a drive for process efficiency next year. Businesses will be expecting employees to be more productive and deliver more value if they demand higher pay.”

While salaries are likely to remain under upward pressure as employees work to boost their incomes to combat the rising cost of living, companies should keep a close eye on which skills are in high demand in their market. It’s the difficulty of hiring for certain skills, rather than headline inflation figures, that should be front of mind as 2024 salary negotiations kick off.

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