Output price inflation

Annual own price inflation among firms in the DMP has gradually declined over 2024. In the three months to November, annual output price growth was 3.9%, down from 4.0% in the three months to August (Chart 1). This refers to prices charged by businesses across the whole economy, rather than just those selling directly to consumers. Looking to the year ahead, firms expect only a small further decline in price inflation. In the three months to November, expected own price growth was 3.7%, suggesting a fall of around 0.2 percentage points is expected over the next 12 months.

Realised and expected price growth have developed differently for goods and services providers. Services price inflation had a lower and later peak, but these firms have seen a slower decline in their own price inflation than firms in the goods sector. In data collected during the three months to November, own price growth for firms in the services sector was 4.7%, unchanged from the three months to August, while firms in the goods sector reported annual own price growth of 2.8%, down 0.2 percentage points from the three months to August. For firms in the goods sector, price inflation is now close to its 2017 to 2019 average, but for service sector firms it remains above. Only firms in the services sector expect annual own price inflation to slow over the year ahead. Data collected in the three months to November suggest that firms in the services sector expect their price inflation to fall to 4.0% over the year ahead. This implies that firms in the services sector expect their own price growth to slow by 0.7 percentage points over the next year. Firms in the goods sector expect a slight increase in their own price inflation.

Chart 1: Declines in own price inflation are expected to slow over the year ahead

Realised and expected annual price inflation and change in inflation expected over the next year ^(a)

• (a) Realised price growth results are based on the question: ‘Looking back, from 12 months ago to now, what was the approximate % change in the average price you charge, considering all products and services?’. Expected price growth results are based on the question: ‘Looking ahead, from now to 12 months from now, what approximate % change in your average price would you expect in each of the following scenarios: lowest, low, middle, high and highest?’ and respondents were asked to assign a probability to each scenario. The purple bars correspond to the difference between the orange and aqua lines. The chart shows three-month average data.

Wage growth

Annual wage growth has continued to decline. In the three months to November, firms reported that their average wage growth per employee was 5.5% (Chart 2). In the three months to October, official statistics reported by the ONS showed that the annual growth in weekly regular pay (which excludes bonuses and pay arrears) was 5.2% across the whole economy and 5.4% in the private sector. Looking to the year ahead, firms in the DMP expect pay growth to continue to decline. Firms expect year-ahead wage growth to be 4.0% in the three months to November, a fall of 1.5 percentage points. But these expectations for year-ahead wage growth have been flat at around 4% throughout the second half of 2024.

Wage growth is expected to decline across all sectors. Wage growth for providers of consumer-facing services (eg accommodation and food, health, and recreational services) has remained above that of business-facing services providers. Annual wage growth for DMP firms in the consumer-facing services sector during the three months to November was 6.5%, and year-ahead expectations were 4.9%, meaning that these firms expect their wage growth to fall by around 1.6 percentage points over the next year. Business-facing services producers expect a slightly smaller decline in wage growth, anticipating that it will fall by 1.2 percentage points from 5.0% over the past 12 months to 3.8% a year ahead.

Chart 2: Firms continue to expect declines in pay growth over the year ahead

Annual and expected year-ahead wage growth ^(a)

• (a) The results on wage growth are based on the questions: ‘Looking back, from 12 months ago to now, what was the approximate % change in your average wage per employee?’; and ‘Looking ahead, from now to 12 months from now, what approximate % change in your average wage per employee would you assign to each of the following scenarios: lowest, low, middle, high, highest?’. For the questions on year-ahead expectations, respondents were then asked to assign a probability to each scenario. A point estimate is constructed by combining the five scenarios with the probabilities attached to them. The purple bars correspond to the difference between the orange and aqua lines. The chart shows three-month average data.

Firms’ responses to increases in employer National Insurance contributions

The 2024 Autumn Budget announced a 1.2 percentage point increase in employer National Insurance contributions (NICs) to 15%, and a reduction in the threshold at which employers start paying NICs for each employee from £9,100 to £5,000. In November, firms were asked about how they expect to respond to these changes. Firms could choose multiple options. 59% of firms reported that they would accept lower profit margins, while 54% of firms reported said that they would decrease their number of employees and increase their prices (Chart 3). 38% of firms expect to pay lower wages than they otherwise would have done. The responses give an indication of the percentage of businesses expecting to make these adjustments, but do not directly quantify the magnitude of adjustment. This question has so far been asked to only one-third of the panel. The remaining panel members will be asked this question in December and January.

Chart 3: Over half of firms expect increases in NICs to lower profit margins, number of employees and increase prices

Firms’ expected response to increases in NICs announced in 2024 Autumn Budget ^(a)

• (a) The results are based on the question ‘How do you expect your business to respond to the changes to employer National Insurance contributions announced in the November 2024 Budget?’ Firms could choose multiple responses between ‘Lower profit margins’ ‘Lower number of employees’ ‘Increase prices’ ‘Lower employee wages’ ‘Other’ ‘None of the above’.

Wage and output price growth by National Living Wage exposure

The Autumn Budget also announced that from April 2025, the National Living Wage (NLW) will increase from £11.44 to £12.21. That increase of 6.7% follows on from increases of 9.8% in April 2024 and 9.7% in 2023. The DMP can be used to examine the impact of these changes on price and wage growth by comparing different groups of firms split by their exposure to the NLW.

In the analysis that follows, firms are defined as having lower exposure to the NLW if 15% or less of their employees are being paid at the NLW in 2024 (based on responses to an earlier question in the DMP survey asked between May and July). This accounts for 69% of firms. Firms with higher exposure, are those with more than 15% of employees at the National Living Wage (31% of firms).

Over recent months, firms with a higher exposure to the NLW have experienced wage growth that is around 1.5 percentage points higher than firms with lower NLW exposure (Chart 4). This suggests that the increase in the NLW from April 2024 has supported aggregate wage growth. There is also some evidence from the DMP of a positive correlation between recent wage growth and the proportion of employees who are paid above but within £2 an hour of the NLW. That may be because pay differentials between employees in lower-paying firms are being preserved. Wage growth has been persistently higher for firms more exposed to the NLW since 2022, likely reflecting past NLW increases. But during 2024, wage growth has fallen for both more and less exposed firms.

Looking to the year ahead, firms with high and low NLW exposure both expect pay growth to decline. In the latest data for the three months to November, firms with higher exposure expected wage growth a year ahead to be around one percentage point higher than the less exposed firms. There were not large changes in this differential after the Budget announcement at the end of October, suggesting that the increase in the NLW for 2025 was largely anticipated by firms, although this gap has widened since the middle of 2024.

Chart 4: Recent wage growth has been higher for firms with more employees who are paid at the National Living Wage

Realised and expected annual wage growth by NLW exposure ^(a)

• (a) The results on wage growth are based on the questions: ‘Looking back, from 12 months ago to now, what was the approximate % change in your average wage per employee?’; and ‘Looking ahead, from now to 12 months from now, what approximate % change in your average wage per employee would you assign to each of the following scenarios: lowest, low, middle, high, highest?’. For the questions on year-ahead expectations, respondents were then asked to assign a probability to each scenario. Breaking down into NLW, the firms, the following question was used: ‘Approximately, what percentage of your employees were paid at the compulsory National Living Wage/National Minimum Wage in 2024?’. The chart shows three-month average data.

Higher wage growth in firms more exposed to the NLW could have implications for prices too if firms seek to pass those costs on. On average since, 2022 own price inflation has been 0.8 percentage higher for firms more exposed to the NLW (Chart 5). However, this gap has closed in the latest data for the three months to November with price inflation for the more exposed firms moving slightly below price growth for less exposed firms for the first time in this series. And looking to the year ahead, there is little difference in expected price growth between the two groups. There are many factors that affect firms’ pricing decisions other than wage growth, but at face-value this descriptive evidence from the DMP implies that recent increases in the NLW are currently having less of an impact of price inflation than on wage growth.

Chart 5: Differences in price growth have been more modest

Realised and expected year-ahead price growth by NLW exposure ^(a)

• (a) The realised price growth results are based on the question: ‘Looking back, from 12 months ago to now, what was the approximate % change in the average price you charge, considering all products and services?’. Expected price growth results are based on the question: ‘Looking ahead, from now to 12 months from now, what approximate % change in your average price would you expect in each of the following scenarios: lowest, low, middle, high and highest?’ and respondents were asked to assign a probability to each scenario. Breaking down into NLW, the firms, the following question was used: ‘Approximately, what percentage of your employees were paid at the compulsory National Living Wage/National Minimum Wage in 2024?’. The chart shows three-month average data.

Interactions between changes to National Insurance contributions and National Living Wage

Announced increases in employer National Insurance contributions and the National Living wage will both have an impact on firms’ labour costs. It is therefore also important to think about how these two policies might interact and not just consider them in isolation.

Firms with a higher exposure to the NLW are less likely to say that they will respond to the increases in National Insurance contributions by paying lower wages and more likely to say that they will respond in other ways (Chart 6). Of the firms with higher exposure to NLW, 33% expect to pay lower wages than they otherwise would done, compared to 41% of firms with lower exposure (Chart 6). More exposed firms were more likely to say that they would increase prices or accept lower profit margins in response to the increases in NICs although the biggest differences were in employment intentions. For firms with higher exposure to NLW, 73% expect to have fewer employees than they otherwise would have done, compared to 47% for firms less exposed to the NLW. These results highlight that the increase in the National Living Wage makes paying lower wages less of a margin of adjustment for firms with lots of employees at the NLW and suggests that they intend to make more changes to prices and employment instead.

Chart 6: Firms with higher exposure to NLW are less likely to expect to lower wages in response to the increase in NICs and more likely to respond in other ways

Firms’ expected response to increases in NICs announced in 2024 Autumn Budget split by NLW exposure ^(a)

• (a) The results are based on the following questions ‘How do you expect your business to respond to the changes to employer National Insurance contributions announced in the November 2024 Budget?’ Firms could choose multiple options. Breaking down into NLW, the firms, the following question was used: ‘Approximately, what percentage of your employees were paid at the compulsory National Living Wage/National Minimum Wage in 2024?’

Methodology

The DMP consists of the Chief Financial Officers of small, medium, and large UK businesses operating in a broad range of industries.

We survey panel members to monitor developments in the UK economy and to track businesses’ views on them. This work complements the intelligence gathered by our Agents.

This note is a summary of surveys conducted with DMP members up to November 2024. The November survey was in the field between 8 and 22 November. The November survey received 2,255 responses.

Further monthly data from the November survey for a limited number of DMP series were published on 5 December 2024. Aggregate level data for all survey questions are published on a quarterly basis. Data from the August to October surveys were released on 7 November 2024. More information can also be found on the DMP website.

The panel was set up in August 2016. It is run by the Bank of England in collaboration with King’s College London and the University of Nottingham. It was designed to be representative of the population of UK businesses. All results are weighted using employment data. See Bunn et al (2024) for more details.

The DMP receives funding from the Economic and Social Research Council.