British employers are anticipating smaller pay increases in the upcoming year compared to three months prior, marking the first decline in nearly four years.

This trend reflects a decreased willingness to accept higher labor costs, as revealed by a significant survey released on Monday.

These findings are likely to bolster confidence among Bank of England policymakers that domestic inflationary pressures are easing, particularly in light of recent substantial decreases in energy prices. This development could pave the way for lower interest rates later in the year.

According to a survey conducted by the Chartered Institute of Personnel and Development (CIPD), British employers are projecting an average increase in basic pay of 4% over the next 12 months. This is a decline from the expected rise of 5% throughout 2023 and in late 2022. Notably, this marks the first decrease since early 2020, when the UK was grappling with the COVID-19 pandemic.

CIPD economist Jon Boys described this shift as "a key moment in the UK labor market."

The estimates are based on a poll of 2,006 employers conducted by YouGov from January 2nd to January 22nd.

While pay increases in the private sector and non-profit organizations were consistent with the median, public-sector employers anticipate a 3% pay raise and foresee the slowest pace of staff recruitment since 2019.

Among all employers surveyed, the proportion indicating that they were financing pay increases through reduced staffing rose to 21% from 12%. Meanwhile, the proportion absorbing higher wage costs in profit margins or general overheads decreased to 37% from 50%.

Earlier this month, the Bank of England announced it was contemplating reducing interest rates from a near 16-year high of 5.25%. However, despite a forecasted decline in inflation to its 2% target, annual wage growth of over 6% posed a risk of temporary inflation.

A Bank of England survey indicated that employers anticipate a 5.2% pay increase this year. Photo by Phil Whitehouse, Wikimedia commons.