U.K. Unemployment Rate Holds Steady as Pay Growth Remains Elevated

The U.K. unemployment rate remained unchanged in June, holding at 4.7%, according to data released by the Office for National Statistics on Tuesday. This marks the highest unemployment rate since July 2021, continuing its rise from 4.7% in May, which was the highest level in nearly four years.

Despite this, pay growth across the entire economy, excluding bonuses, held steady at an annual rate of 5.0% for the three months leading up to June, signaling persistent inflationary pressures. This robust pay growth complicates the Bank of England’s policy decisions, particularly as the central bank grapples with the balance between a cooling jobs market and rising inflation.

Hiring Intentions Weaken

The Bank of England has been closely monitoring the labor market, where signs of deterioration are becoming apparent. The number of job vacancies has been in continuous decline for the past three years, and a recent survey by the Chartered Institute of Personnel and Development revealed that U.K. businesses are now showing their weakest hiring intentions since the COVID-19 pandemic. The survey found that only 57% of private sector employers plan to recruit over the next three months, marking the lowest hiring expectations since early 2021.

The survey also highlighted that higher employer social security contributions, introduced by finance minister Rachel Reeves, along with increased minimum wages, are adversely impacting job creation, particularly in the hospitality and social care sectors.

Inflationary Pressures Remain

At the same time, inflation continues to be a concern. The U.K.’s annual inflation rate hit a hotter-than-expected 3.6% in June, with core inflation—excluding volatile items like food, energy, alcohol, and tobacco—rising to 3.7%, up from 3.5% in May. These figures suggest that underlying price pressures persist despite cooling labor market conditions.

Bank of England Faces Tough Choices

The Bank of England is facing a tough decision ahead of its September meeting, with four of its nine policymakers having opposed the recent quarter-point interest rate cut to 4%. Policymakers are likely to need convincing that domestic inflation pressures are truly easing before they take further action. The central bank’s ability to navigate these competing pressures will be crucial in determining the economic trajectory in the coming months.