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Will salary increases outpace inflation in 2026?

By John M. Bremen | February 05, 2026

Salary increases remain comparatively high by historic standards, exceeding the pre-pandemic norm of 3% amid higher total labor expenses.

Effective leaders around the world are recalibrating their approaches to salary planning in response to a shifting economic landscape.

What’s happening with salary increases and employee turnover in 2026?

The December 2025 edition of WTW’s Global Salary Budget Planning Report finds that U.S. salary budgets for 2026 are expected to remain stable at 3.4%, the same as the actual salary budget increase for 2025. Actual salary budgets in 2025 were lower than the planned budgets of 3.7% (down from 3.8% in 2024). Even so, salary increases remain comparatively high by historic standards (the pre-pandemic norm was 3%) amid higher total labor expenses, which include salaries, bonuses, variable pay and benefits costs.

Voluntary employee turnover rates dropped to 10.1% over the last year as job hugging and other employment patterns changed. Today, only 24% of organizations report issues with attracting or retaining employees, down from 36% last year, 45% from 2024 and 53% from 2023.

For the current cycle, nearly two-thirds of employers (62%) have not changed their projected pay budgets since they were first set midway through last year. While few (6%) are increasing budgets, over one-fifth (21%) of employers report decreasing pay budgets. For those making changes to their initial budget projections, concerns relate to cost management (36%), recession or weak financial results (36%), a tight labor market (32%) and inflationary pressures (25%).

What's happening with inflation?

While inflation is generally more stable today than it was a year ago in many developed economies, results vary materially by country. For example, in the U.K., the December 2025 year-over-year Consumer Price Index was up to 3.4% from 2.5% last December. Eurozone year-over-year inflation was down to 1.9% in December 2025 from 2.4% last December. U.S. year-over-year inflation was down to 2.7% in December 2025 from 2.9% in December 2024. Canada’s year-over-year inflation was up to 2.4% in December 2025 from 1.8% last year.

Many leaders are relieved that inflation remains lower than its highs during the pandemic (for example, in the U.K. it reached a peak of 11.1% in 2022), but they are concerned about it increasing again. Economists generally believe inflation will remain below 3% in the cited markets, with caveats built into forecasts for unanticipated factors such as changes in trade policies (e.g., tariffs), energy cost spikes, wars and territory conflicts, disease outbreak or severe skill shortages. This means that salary increase budgets likely will outpace inflation in 2026 in most countries, though there could be exceptions in markets such as the U.K. if inflation remains high compared to other nations.

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. 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 and 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 changing direction.

For the 20 years before the pandemic, salary increases outpaced inflation in countries including the U.S. However, during 2021 and 2022, inflation rose higher than salary increases. Starting in 2023, salary increases again outpaced inflation each year.

What are effective leaders doing?

Effective leaders are taking the following actions to remain competitive while watching costs:

  1. 01

    Analyze broadly, budget for stability and do more with less

    WTW’s Lori Wisper writes in Preparing for 2026 salary increases that effective leaders view results broadly and plan for the long term, knowing that salary increase budgets are stabilizing but still tight. They strategically allocate salary increments, focusing on key skills, key roles or high performers. To validate pay competitiveness without falling behind on efforts to attract, retain and engage colleagues, they monitor market and workforce data closely, knowing that things change quickly. Simultaneously, they manage costs for 2026 and beyond.

  2. 02

    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.”

  3. 03

    Understand the impact of AI

    As AI adoption continues, effective leaders reimagine processes and take a “best of” approach that considers which processes are best served by AI, humans or, most frequently, both. This impacts organizational and work design as well as the design of jobs and compensation programs. While it is still early for most companies in terms of AI adoption, effective leaders are addressing new skill and job requirements while shifting competitive market practices in 2026.

  4. 04

    Focus on total rewards, including benefits

    WTW’s Monica Martin and Ken Kuk write in Total rewards in 2025: Finding the competitive edge and driving value that effective leaders look at pay, benefits, wellbeing and careers holistically to develop programs that help attract and retain their talent while managing costs. Employees deeply value healthcare and retirement benefits, but their costs to companies and employees continued to increase in 2025 and are not captured in salary increase budgets.

    Effective leaders understand employee concerns about how salary increases can be overwhelmed by cost increases and inflation even as employee productivity and performance increases. They help their employees understand the full range of pay and benefits available to them.

  5. 05

    Enhance the employee value proposition and the employee experience

    Effective leaders enrich their employee value proposition beyond pay and benefits through 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. WTW research shows that organizations with high-performing employee experiences outperform those without.

  6. 06

    Focus on flexibility

    WTW research also shows that effective leaders understand that employees value choice and use flexibility to attract and retain talent even as more employees return to offices through hybrid or onsite work arrangements. WTW’s most recent Global Benefits Attitudes Survey shows that, in many cases, employees are willing to accept lower pay in return for flexibility. Effective leaders are implementing new talent strategies and increasing focus on culture and employee experience, as well as the transformation of pay, benefits and career programs to support the new work models.

Even as salary budgets stabilize, effective leaders navigate uncertainty and changing employment patterns to create lasting value for their people and shareholders.

A version of this article originally appeared on Forbes on January 30, 2026.

Author

John M. Bremen
Managing Director and Chief Innovation and Acceleration Officer
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