UK Labour Market: Unemployment Drops, Earnings Cool—A Story of Subtle Shifts
So, the latest ONS numbers for the Jan‑Jun quarter turned up a bit of a gentle sigh in the labour market: unemployment fell to a tidy 4.2%, the lowest level since February. It even beat the BoE’s 4.4% forecast slotted in the August Monetary Policy Report.
But before you pop a celebratory toast, remember that the ONS data still has that reliable—yet notoriously slippery—fame for “cautionary” caveats. In other words, don’t let your joy run wild just yet; policymakers are playing it safe, treating the jobs figure with a generous “pinch of salt.”
Earnings: The Slower Slide
Where the labour market is still a bit snug, earnings growth is taking a noticeably slower nap. The wave of pay hikes that hit the NHS in the previous year added a hefty “base effect” that has yet to roll into the same momentum again.
- Overall pay rose 4.5% year‑over‑year – the slowest pace since November 2021.
- Pay excluding bonuses climbed 5.4% – which, while better than a flat line, still isn’t the kind of uptick that points toward sustainable inflation recovery.
With those numbers cooling, the road to the 2% inflation target looks a little longer than anticipated. And for our dear BoE hawks, the recent extra public‑sector pay rises only add a fresh dose of upside earnings risk.
Monetary Policy: The Hawkish Conundrum
At the August MPC meeting, four members pulled the hammer to keep rates steady, while a razor‑thin 5‑4 majority cut the Bank Rate by 25 bps. Even the five who consented to a cut felt it was a “finely balanced” bite.
What does that mean for the future? In short, investors might take a breather if the job and earnings data seem rosy, but the ongoing inflationary pressure—as well as the next CPI report—keeps the pace of normalisation cautious.
My baseline now stays on the “quarterly cuts” play: The next likely step is a 25 bps cut in November—possibly even a split decision again—once the MPC updates its macro outlook.
Market Outlook: Too Much or Too Little?
Curiously, the yield curve is pricing in almost 45 bps of cuts across the year. That feels a tad hot, given that policymakers are reluctant to lean too dove‑ish. If some of that easing gets priced out, the pound could find a bit of tidy footing, though the big‑four currencies may be tasting over‑priced moves.
In essence: a cooler earnings tide, a slightly below‑spectacular unemployment dip, and a market still betting on a brisk swing to lower rates. Let’s keep an eye on the July CPI, and perhaps—just for the fun of it—let’s also keep the Brits busy with the snack on their desks before the next policy round.
