UK wage figures affect state pension, interest rates and Rachel Reeves | Salary

Of the many figures included in the monthly health check of the UK labour market provided by the Office for National Statistics, one figure is particularly important: the annual growth rate of average earnings.

This is not because other data are unimportant. The unemployment rate (down from 4.2% to 4.1%), the number of employed, the level of vacancies, and the number of days lost to strikes all convey important information about the state of the economy.

But this month, we're particularly interested in the increase in income between May and July compared to the same three months a year ago, because that 4% figure is used to calculate one component of the pension triple fix.

This is the formula the government uses to calculate the state pension increase that takes place each April. First introduced by David Cameron’s coalition government in 2012, it ensures that pensioners receive an increase equal to average earnings, inflation or 2.5 per cent, whichever is higher.

Next year’s increase is likely to be based on average incomes, as inflation is running at 2.2%. There could be a slight increase in September, the month used to calculate the cost of living component of the triple-lockdown, but experts believe it will only be 2.3%.

Likewise, earnings figures could change by a fraction, as the 4% annual increase in the three months to July is tentative and subject to revision as the ONS collects more payroll data. However, based on historical data, the revisions are likely to be modest.

As a result, the new full state pension will rise by $460 a year, or just over $9 a week, from April. That's less than half the more than 8% increase in April, based on average earnings.

There are two reasons why the current earnings growth rate is lower than in the summer of 2023. First, the annual inflation rate has fallen from its peak of 11.1% in late 2022 to the official target of 2%, which has led to a decrease in salary payments. Second, in the period from May to July 2023, a one-time bonus was paid to public sector workers that was not repeated this year.

If the pension increase was based on the annual regular salary increase excluding bonuses, the increase in April next year would have been 5.1%, not 4%. But last year, the total salary increase rate was ahead of the regular salary increase rate of 7.8%.

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The Bank of England will welcome the moderation in earnings growth, as it looks closely at private sector wage trends when determining the level of interest rates.

But the 4% figure is also important to Chancellor Rachel Reeves, who faces a key vote on Tuesday on her plan to scrap the winter fuel allowance for 10 million pensioners who are not eligible for pension credit or other state benefits. Reeves will be hoping the 4% increase will help defuse the controversy and limit the number of Labor rebels who oppose the measure.

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