British employers are projecting the smallest salary increases in two years, signaling a potential ease in inflationary pressures.

A recent survey by the Chartered Institute of Personnel and Development, involving 2,000 employers, indicates that private sector pay raises are expected to decrease from 4% to 3% over the coming year, marking the lowest level since mid-2022. In the public sector, pay increases are predicted to drop from 3% to 2.5%.

The decline in pay expectations is favorable news for the Bank of England’s rate setters, who have been grappling with persistent wage growth and a tight labor market. The 3% pay increase reported is aligned with the Bank’s goal of maintaining inflation at its 2% target.

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Overall economic pay, excluding bonuses, increased by 5.7% in the three months leading up to May. Economists predict new figures this week will show this rate decreased to about 5.2% in June.

Despite a drop in inflation to the Bank’s 2% target over the past two months, primarily driven by lower energy and goods prices, wage growth has remained robust. Upcoming figures are expected to show a minor increase in consumer price inflation to 2.3% in July.

The combination of declining inflation and solid wage growth has enhanced real earnings over the past year, boosting consumer expenditure.

James Cockett, a senior labor market economist at the CIPD, stated that the anticipated drop in pay expectations follows a broader decline in inflation this year. “However, many employees will still feel worse off compared to a few years ago, so employers should consider offering flexible working arrangements, benefits that enhance take-home pay, and initiatives to improve job quality to support and retain staff,” he said.

Last month, the government announced it would accept recommendations to increase public sector pay by an average of 5.5% for the following year, a decision the Bank has indicated will not ignite inflation. The monetary policy committee recently reduced interest rates for the first time in four years and released forecasts suggesting pay growth is set to average 3% by next year.