FX.co ★ UK experiences rising unemployment and inflation

Unemployment in the United Kingdom has unexpectedly jumped to its highest level in 2.5 years. Many experts blame the heated and contentious election campaign, which has turned the national economy into a battlefield.

Adding to the problem, wages have surged. This has influenced expectations of the key rate cut by the Bank of England.

“What the Bank of England crucially wants to see is wage inflation fall more than it has, especially with the headline rate of inflation very much near target,” Richard Carter, head of fixed interest research at Quilter Cheviot, said. This scenario could stabilize the situation.

“The BOE will be incredibly cautious to cut rates at a period when spending power is high for consumers and potentially triggering a fresh inflationary bout. As such, today’s data will continue to put a dampener on a rate cut in June or August, with November remaining the likeliest date to see that first fall," Carter added.

Consulting firm Capital Economics noted that while slackening wage growth is a "lingering concern" for the Bank of England, “the rate should soon be on a ‘firm downward path’ as unemployment rises,” CNBC wrote. “Wage growth may not stop the Bank from cutting interest rates for the first time in August,” Capital’s deputy chief UK economist Ruth Gregory said.

According to the UK’s Office for National Statistics (ONS), unemployment rose to 4.4% from February to April 2024, up from 4.3% in the previous quarter, reaching the highest level since September 2021. Many economists had anticipated the indicator to remain stable.

The number of payrolled employees climbed by 0.6% year-on-year in May. Meanwhile, from February to April, annual wage growth, excluding bonuses, remained at 6% and was 5.9%, including bonuses, significantly surpassing the inflation rate.

Average weekly earnings, excluding bonuses and adjusted for the consumer price index, advanced by 2.3% in the three months to April compared to 2023.

Analysts also point to the inactivity rate, which measures people not working or seeking a job. This indicator jumped to 22.3%, the highest level since mid-2015. The number of people not working due to long-term illness hit a record 2.3 million.

Wage growth data is a key indicator of inflation pressure for the Bank of England. Wage growth in the private sector, which slid to 5.8% from 5.9%, is also crucial.

According to the ONS, the number of employed people has dropped by 207,000 since the end of 2023, while the number of unemployed people has jumped by 190,000. Against this backdrop, the British pound plummeted.

These current figures are likely to impact the regulator's rate decision at the next meeting on June 20. The data clarified the state of the UK economy ahead of the elections. Analysts suggest the ruling Conservative Party might lose to the Labour Party.

British politicians have also commented on the situation. Prime Minister Rishi Sunak and Labour leader Keir Starmer emphasize economic growth, the cost of living, and taxes in their campaigns. Sunak’s team claims that under his leadership, the economy is improving, whereas the inflation drop is just a matter of time.