A new analysis from accounting and consulting firm RSM UK warns that UK workers could see their purchasing power erode in the second half of 2026, as inflation outpaces nominal wage growth amid fresh economic pressures from the Middle East conflict.
Real wages refer to the purchasing power of workers’ earnings after adjusting for inflation – essentially, how much goods and services a person’s pay can actually buy, rather than just the nominal figure shown on their payslip.
The warning comes as part of RSM’s “Workforce 2026” report, which draws on a survey of 300 UK businesses with turnovers from £50 million to over £500 million conducted in March.
Before the escalation in the Middle East, RSM had projected real wage growth averaging less than 1% over the next two years, in line with a “lower and slower” outlook for inflation, economic growth, and interest rates.
That picture has now darkened and RSM now expects real wage growth to turn negative in the second half of 2026. Higher energy prices flowing from the conflict are seen pushing inflation higher, while nominal wage increases fail to keep pace.
Inflation is forecast to average around 3.5% in 2026, with a potential peak of 3.5–4% later in the current year. At the same time, broader wage pressures are easing as the labour market cools.
Recent official data already show real pay growth has slowed sharply. In the three months to January 2026, regular pay (excluding bonuses) rose 3.8% nominally but delivered only modest real-terms gains once adjusted for inflation.
The Office for Budget Responsibility (OBR) similarly anticipates nominal weekly wage growth slowing to around 3.5% in 2026, with real pay growth remaining subdued or turning negative under certain scenarios as the labour market loosens further.
Labour market turning fragile
The report points to a weakening jobs market as a key factor limiting workers’ ability to secure bigger pay rises. Unemployment is now projected to climb towards 5.5% in 2026, and could reach 6% if energy prices spike further or the conflict reignites after the April ceasefire.
The ratio of unemployed workers to vacancies has deteriorated to around 1:2.5, the weakest since 2014. This compares with a much tighter 1:1 ratio during the 2022/23 energy price crisis, when workers had stronger leverage to negotiate catch-up pay deals.
RSM notes that 62% of surveyed employers already cite rising employment costs as their biggest challenge, while 57% point to higher salary expectations from staff. Yet with demand softening, many firms are responding cautiously: 37% are cutting back on hiring or hours, and a third are reducing overtime opportunities.
Economic growth is expected to slow to around 0.5% amid the energy shock, raising the risk of stagflation – weak growth combined with elevated inflation.
Negative real wage growth would squeeze household incomes at a time when consumer confidence is already fragile. This could weigh on discretionary spending and broader economic demand.
For employers, the combination of higher inflation, regulatory changes (including the Employment Rights Act coming into force in 2026), and National Insurance hikes is intensifying cost pressures.
Many are boosting HR resources to handle compliance and potential disputes, while reviewing probation periods and performance management in anticipation of stronger worker protections.
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