UK Pay Growth Slows to 3.9% Before Bank Rate Decision

Published: 15 September 2026. The English Chronicle Desk. The English Chronicle Online.

UK wage growth has slowed to 3.9% as the labour market shows further signs of losing momentum, adding to a difficult set of choices for the Bank of England as it prepares for a closely watched interest rate decision.

Official figures show that average total earnings, including bonuses, increased by 3.9% in the three months to July, down from 4.1% in the three months to June. The result was broadly in line with expectations among City economists, but the slowdown comes at a sensitive moment for the UK economy, with households facing renewed pressure from higher energy and transport costs.

The latest wage figure is also particularly important for millions of pensioners because it is expected to determine the annual increase in the state pension under the government’s triple-lock system. Under the mechanism, the state pension rises each year by whichever is highest among average earnings growth, inflation or 2.5%.

If the 3.9% earnings figure is used for the calculation, the annual state pension would rise by around £488 from April, taking the yearly payment to more than £13,000. The increase would provide additional support for pensioners at a time when household budgets remain under pressure, although the wider economy continues to face uncertainty over inflation and employment.

The figures from the Office for National Statistics also pointed to a cooling labour market. The number of workers on company payrolls continued to edge lower, with reductions particularly evident in sectors such as retail and hospitality. Meanwhile, the number of vacancies across the economy fell to 702,000 in the three months to August, compared with 706,000 in the previous month.

The decline in vacancies highlights the growing caution among employers. Liz McKeown, director of economic statistics at the ONS, said vacancies remained at their lowest level outside the pandemic period for more than a decade. She also noted that smaller businesses were continuing to report that higher labour costs were influencing decisions about recruitment.

For workers, the combination of slower pay growth and persistent price pressures presents a complicated picture. While wages are still increasing at a faster pace than the Bank of England’s 2% inflation target, the slowdown suggests that employers may be becoming less willing or able to raise pay rapidly as operating costs increase.

The figures arrive just days before the Bank of England is due to consider interest rates. Investors broadly expect the central bank to leave its benchmark rate unchanged at 3.75%, although there remains some expectation in financial markets that policymakers could consider a quarter-point increase if inflationary pressures become more persistent.

The Bank faces a particularly difficult balance. A weaker labour market and slowing wage growth could reduce the domestic pressure pushing prices higher, providing an argument against further increases in borrowing costs. At the same time, the sharp rise in global energy prices has created a fresh risk that inflation could accelerate again.

Oil prices have climbed above $107 a barrel, while motorists in Britain have faced higher petrol and diesel prices. The rise in energy costs has been linked to renewed geopolitical tensions in the Middle East, increasing uncertainty for businesses and households already dealing with elevated living costs.

The UK economy has nevertheless performed better than some forecasts had suggested in recent months. The latest labour market figures showed that the unemployment rate remained at 4.9%, rather than rising to the 5% level some economists had anticipated.

Underlying pay growth also remained relatively steady. Excluding bonuses, average earnings increased by 3.5% in the three months to July, unchanged from the previous period and matching economists’ forecasts.

That combination of steady underlying wage growth, weaker employment indicators and rising energy costs leaves policymakers facing competing signals. The labour market is losing strength, but the external inflationary environment is becoming less favourable.

Suren Thiru, chief economist at the Institute of Chartered Accountants in England and Wales, said the continued decline in vacancies should raise concerns about the outlook for employment. He argued that higher staffing costs, regulation and increased automation were weighing on demand for workers.

Businesses have increasingly raised concerns about the cost of employing staff. Employers have criticised higher taxes on employment and increases to the minimum wage, arguing that these measures are adding to costs at a time when companies are also dealing with higher energy and other operating expenses.

The concern is that weaker hiring could eventually translate into slower wage growth and higher unemployment. Smaller companies may be particularly vulnerable because they often have less capacity to absorb increases in payroll and regulatory costs.

For the government, however, the labour market figures offer a more mixed message. Work and Pensions Secretary Pat McFadden said the employment market had remained resilient, while acknowledging that more needed to be done to help young people develop the skills, experience and confidence required to find work.

The next major test for households will come with the release of the latest inflation figures. Official data are expected to show that the headline inflation rate increased above 3% in August. That would put further pressure on consumers who have already experienced several years of elevated prices following the pandemic and the disruption caused by Russia’s invasion of Ukraine.

Inflation remains significantly above the Bank of England’s 2% target, even though the labour market is showing signs of deterioration. The central bank must therefore decide whether the latest increase in external energy costs is likely to feed into broader and longer-lasting inflation or whether weaker domestic demand will eventually contain the pressure.

Jake Finney, a senior economist at PwC UK, described the situation as a dilemma for policymakers. In his assessment, the weakness of the labour market makes a higher interest rate difficult to justify, while the deteriorating international environment increases the possibility of renewed inflation.

The sharp increase in oil prices is particularly significant because energy costs can affect the economy well beyond the petrol station. Higher fuel prices can raise transport expenses for businesses, increase distribution costs and eventually feed into the prices of goods and services. If those pressures persist, households could face another squeeze on disposable income.

At the same time, higher interest rates would increase borrowing costs for households and companies. Mortgage holders, prospective homebuyers and businesses seeking finance could all feel the effects of tighter monetary policy, potentially weakening economic activity further.

The slowing rate of pay growth therefore provides the Bank with some evidence that domestic wage pressures are easing. Yet policymakers cannot ignore the possibility that an external energy shock could reverse some of the progress made in bringing inflation down.

For pensioners, the immediate picture is more straightforward. If the 3.9% wage growth figure determines the triple-lock increase, the state pension will receive a sizeable rise from April. For workers and employers, however, the latest figures point towards a more uncertain autumn, with hiring slowing, vacancies declining and the cost of living once again under pressure.

The Bank of England’s upcoming decision will consequently be watched closely across the economy. Its challenge will be to prevent renewed inflation from becoming entrenched without placing additional strain on a labour market that is already showing signs of weakness.

The latest wage figures suggest that the UK economy is entering this decision with neither a clear case for tighter policy nor an entirely comfortable case for maintaining the status quo. For households, businesses and pensioners alike, the direction of interest rates, inflation and employment will remain closely connected in the months ahead.