Wages steady, labor market looser
UK companies are not planning bigger raises despite higher inflation. The Bank of England's regional agents put the typical pay settlement at 3.6% so far this year and said firms expect broadly the same in 2027, while noting most contacts have not yet provided 2027 estimates even though the number who did doubled this round.
That steadiness comes with a policy wrinkle. Current pay growth still runs ahead of what is seen as compatible with the 2% inflation target, and rate-setters have been split over the risk of so called second round effects from wages. The agents described limited pass through from the Iran war energy shock into settlements and said, "There is no evidence of a general late-year inflation premium in settlements as affordability, subdued demand and the looser labor market are limiting pass-through into larger awards," even as union pressure and specialist hiring needs push the other way.
Prices, food and retailers
Food price inflation is likely to finish the year in a 3% to 4% range, and the agents said it had been "milder than expected" in 2026. They flagged El Niño as an "upside risk" for grocery bills next year. To keep sales moving, retailers are rolling out hefty promotions because households are dealing with rising fuel at the pump and bigger energy charges.
In a separate update, the BOE said businesses' inflation expectations edged higher in October but stayed short of the peaks reached earlier this year. A survey of chief financial officers found they anticipate consumer prices will increase 3.4% over the coming 12 months, versus 3.3% in September. The survey indicates they plan a 4% increase in their own prices, marking the strongest reading since June. Just under one in four say they will raise pay due to higher inflation, two thirds said they will raise prices, and seven in 10 said profits will take a hit.
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What economists and markets see next
Markets are pricing in a BOE rate increase at next week's meeting, the first in more than three years, and traders view it as the beginning of multiple hikes prompted by the worsening energy shock. The central bank is also set to release new inflation projections next week, having earlier cautioned that price growth is likely to exceed 4% early next year.
Bloomberg Economics said the latest Decision Maker Panel figures indicate that, even with energy prices elevated, inflation expectations are still contained, reinforcing evidence that the labor market is softening. They project inflation to crest above 4% in early 2027 and expect the BOE to hike next week as insurance against the energy shock making inflation more persistent. A different poll from Citi and YouGov found that households' inflation expectations eased a bit in October.
Why it matters for investors
Wage restraint alongside higher energy costs points to less fuel for a wage price spiral, yet enough price pressure to keep policy tight. That means a near term backdrop of higher rates and cautious consumers, with retailers leaning on discounts and margins under strain.
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