Will salary increases outpace inflation in 2025?

What’s happening with salary increases and talent shortages?

The December 2024 edition of WTW’s Global Salary Budget Planning Report suggests that salary increase budgets are stabilizing, with 2025 planned increases projected to be on average 3.7%, compared with 3.8% in 2024. Salary increases remain at a relatively high rate by historic standards (the pre-pandemic norm was 3%) amid higher total labor expenses (which include salaries, bonuses, variable pay and benefits costs). Overall, fewer organizations (36%) reported difficulty in attracting and retaining employees, down nine percentage points from last year and 17 percentage points from the year prior.

What’s happening with inflation?

Inflation is lower today than it was last January in most countries, but it has reversed course in recent months. In the U.K., the January year-over-year Consumer Price Index (CPI) was down compared to last January at 3.0% (while up from 1.7% in September). The Eurozone CPI was 2.5% (up from 1.7% in September), and in the U.S. it was 3.0% (up from 2.4% in September).

While many leaders are relieved that inflation is lower than a year ago, they’re concerned about it increasing again in many countries given the changing economic policies resulting from 2024 national elections. Most economists generally believed inflation would remain below 3% in these markets in 2025 and now are adjusting estimates based on factors such as changes in trade policies (such as tariffs), energy cost spikes, wars and territory conflicts, and severe skill shortages. This means salary increase budgets may still outpace inflation in 2025, but perhaps not as much as was previously predicted.

Why do salary increases and inflation sometimes move differently?

While inflation and salary increases generally move in the same direction, they are driven by different inputs and can move differently. Inflation represents changes in the cost of a market basket of goods (such as groceries and fuel). Salary increases, on the other hand, are driven by changes in supply or demand for labor, which can be caused by demographic trends, labor participation rates, technological advances and productivity growth. Salary increases are generally less volatile than inflation, and they often lag inflation in directional changes.

For the 20 years before the pandemic, salary increases outpaced inflation in countries such as the U.S. Yet during the high-inflation years of 2021 and 2022, the numbers were flipped, with inflation rising higher than salary increases. By 2023, salary increases again outpaced inflation, continued to do so in 2024 and likely will in 2025 as well.

What are effective leaders doing?

Effective leaders take the following actions when planning salary budgets in changing economic environments to remain competitive while watching costs:

1. Budget for stability. Effective leaders prepare for a future in which salary budgets don’t grow at the rates seen in recent years. They strategically allocate salary increments, focusing on key roles or high performers. They also watch the market and workforce data closely, knowing that things change quickly. They aim to validate pay competitiveness without falling behind on efforts to attract, retain and engage colleagues. Simultaneously, they manage costs for 2025 and beyond.
2. Practice geographic customization. Effective leaders at global companies tailor their compensation strategies to address regional economic conditions, recognizing divergence in salary growth trends in different markets. They understand that practices vary widely across geographies and that one size does not fit all in 2025.
3. Focus on total rewards, including benefits. Effective leaders view pay, benefits, wellbeing and careers holistically, and develop programs that help attract and retain their talent while managing costs during times of economic change. Employees deeply value employee benefits such as health care and retirement. Their costs to both companies and employees continued to increase in 2024, but aren’t captured in salary increase budgets.
   Effective leaders appreciate that salary increases can be “eaten up” by cost increases and purchasing power further eroded, even if employee productivity and performance increases. Even though inflation is down, price increases from the past several years impact their employees daily.
4. Enhance the employee value proposition and the employee experience. Effective leaders enrich their employee value proposition beyond pay and benefits through a variety of means, including career development and other employee engagement efforts. A positive employee experience is characterized by a work environment where employees feel valued, engaged and connected to the organization’s purpose. Recent WTW research shows that organizations with high-performing employee experiences outperform those without them.
5. Focus on flexibility. WTW research also shows that effective leaders understand that employees value choice and use flexibility to attract and retain employees even as stories of return-to-office mandates fill the press. WTW’s 2024 Global Benefits Attitudes Survey shows that, in many cases, employees are willing to accept lower pay in return for flexibility.
6. Focus on key employees, skills and roles. Effective leaders understand that salary budgets only go so far. They know that in times of inflation, recession concerns and cost management, they need to make tough decisions and focus pay investment on employees with the most critical skills and in the most critical roles.

In 2025, effective leaders continue to balance conflicting factors, using salary increases strategically rather than just paying more.

Note: A version of this article was originally published in Forbes on January 31, 2025. It has been updated to reflect January 2025 inflation data.

Author

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John M. Bremen

Managing Director and Chief Innovation & Acceleration Officer

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