Wage growth slowed sharply in the three months to January according to the latest snapshot of the jobs market from the Office for National Statistics.

Average earnings fell to 3.8% in the three months to January, from 4.2%, which was a larger fall than forecast by City economists. It was the slowest rate of wage growth in more than five years.

The unemployment rate was unchanged at 5.2%.

Job vacancy rates remained steady and the number of people entering the labour market edged up, but only slightly, the ONS said.

Younger workers are faring worse in the labour market than other groups, said Martin Beck, the chief economist at the consultancy WPI Strategy.

“The split between younger and older workers remains stark. Since payroll employment peaked in mid-2024, the number of employees aged 34 and under has fallen by almost 220,000, while employment among those aged 35 and over has risen by 110,000. That points to employers cutting back most sharply on entry-level hiring,” he said.

The figures also showed that a reduction in public sector wages growth was one of the biggest factors affecting the overall drop in average earnings growth, excluding bonuses, which financial markets expected would only dip to 4% in January.

Public sector wage settlements have often been delayed for several years and included bonuses to offset the previous spike in inflation. The ONS said these had begun to drop out of the annual figures, bringing down the overall average.

Annual average regular earnings growth was 5.9% for the public sector and 3.3% for the private sector.

The slowdown in wage growth is unlikely to sway Bank of England policymakers, who meet later today and are expected to leave interest rates on hold at 3.75% amid the Middle East conflict and a steep rise in oil prices.

Before the war on Iran, central bank policymakers were expected to cut interest rates to prevent the economy from sliding into recession, but concerns about a rise in inflation caused by higher oil prices was expected to stay their hand.

Peter Dixon, a senior economist at the National Institute of Economic and Social Research, said the slowdown in wage growth presented policymakers with a dilemma, pulling down inflation while the war in the Middle East pushed up prices.

“The continued weakness of the labour market will add to the headaches facing the Bank of England ahead of today’s interest rate decision,” he said.

He added that the central bank would be concerned that workers will bid up wages in response to rising petrol prices and a spike in inflation over the coming months.

“While there are upside risks, we view these as limited due to the fragility of overall activity and the potential for AI-related change in the labour market which will act as a further damper on wages,” he said.

Jake Finney, a senior economist at PwC UK, said the weakness of the labour market reduced the likelihood of higher energy prices feeding through into broader inflation “and makes further rate hikes harder to justify. But cuts remain unlikely until geopolitical tensions ease.”

On Wednesday the US Federal Reserve held interest rates at a range of 3.5% to 3.75%, resisting pressure from Donald Trump to lower them.