UK jobs data keeps questioning the need for rate hikes

On the face of it, the latest UK jobs report doesn’t look so bad. The unemployment rate ticked down to 4.9%. Payrolled employment rose after three consecutive monthly declines (it increased by a marginal 2,000 workers). Average weekly earnings growth was higher than expected.

But the details still look dovish for the Bank of England. And the report is another reminder that the case for higher rates is far from clear-cut.

Take those payroll numbers. April’s atrocious 100,000 fall in employment has been cut in half, after revisions. That’s not a surprise; the latest reading is always prone to change – and usually in an upwards direction. But the newly revised April figure, showing a 53k drop in workers, is still pretty bad. The better May figure should be read in that context – and if you strip out government, private sector payrolls still fell.

What’s more, April’s upgrade doesn’t appear to have lifted the consumer-facing industries which have been at the eye of the storm for the past year.

If anything, the rate of decline in job numbers in hospitality, retail and other consumer sectors is getting worse. We calculate that employment is falling by 3.5% in annualised terms across consumer-facing industries.

On wages, the surprise resilience was solely down to a big bump in public pay. While the Bank of England can’t totally ignore that, it remains much more focused on the private sector. And here pay growth is still easing off. The annual rate is now below 3%, a sizeable drop from 5.2% a year ago. The three-month annualised rate is even lower and suggests that the annual rate has further to fall in the near-term.

The broader context here matters. A year ago, we saw a big increase in employer taxes (National Insurance) and the National Living Wage. And that came alongside a period of rising food inflation. Just as we’re seeing now, that sparked a debate at the BoE about whether all of that would combine to push inflation up and spark another long-winded wave of price pressure.

That hasn’t happened. Yes, headline inflation did go close to 4% last year, but the latest CPI numbers don’t point to much in the way of second-round effects. And these jobs numbers continue to suggest that firms have dealt with those cost pressures through weaker hiring.

Fortunately, the big fall in energy prices, if sustained, should help contain the fallout of the Middle East crisis across the UK jobs market, though that experience from 2025 still offers a potential playbook for today. We suspect we’ll continue to see pressure on hiring over the coming months.

A substantial slowdown in net migration suggests further upside pressure on unemployment is limited, but tepid hiring demand suggests we’re unlikely to see a big fall, either – notwithstanding volatility in the numbers.

In short, today’s figures keep the Bank of England on track for a hold today, and so long as the Iran deal holds, we think rate hikes can be avoided.