Employers in Britain are expecting to hand out the smallest pay rises in two years in a sign that inflation pressures are easing.

A survey of 2,000 employers by the Chartered Institute of Personnel and Development found that private sector pay deals would fall from 4 per cent to 3 per cent over the next year, the lowest level since the summer of 2022. In the public sector, pay deals are expected to fall from 3 per cent to 2.5 per cent.

Falling pay expectations will be welcome news for ratesetters at the Bank of England, who have been dealing with stubbornly high wages growth and a tight labour market. Pay intentions reported by the institute are within the 3 per cent range that is consistent with maintaining inflation at the Bank’s 2 per cent target.

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Pay throughout the economy, excluding bonuses, rose by 5.7 per cent in the three months to May, with new figures released this week expected to show a dip to about 5.2 per cent in June, according to economists.

The pace of pay growth has remained high even as inflation has dropped back to the Bank’s 2 per cent target in the past two months, driven mostly by falling energy and goods prices. Figures released next week are expected to show a slight rise in consumer prices inflation to 2.3 per cent in July.

A decline in inflation coupled with robust pay growth has helped to boost real earnings over the past year, supporting consumer spending.

James Cockett, senior labour market economist at the CIPD, said that the drop in pay intentions had been expected after a broader fall in inflation this year. “However, many workers will still feel worse off than they did a couple of years ago, so other benefits, like providing flexible working, offering benefits that help to boost take-home pay and taking steps to improve job quality, are in employers’ interest to help support and retain staff,” he said.

The government said last month that it would accept recommendations to increase public sector pay by an average of 5.5 per cent in the coming year, a move that the Bank has said will not stoke inflation. Its monetary policy committee cut interest rates for the first time in four years this month and published forecasts showing that pay growth was on course to fall to an average of 3 per cent by next year.