UK unemployment has risen to 5.2% and wage growth has cooled to 4.2%, underlining a softening labour market that strengthens the case for interest rate cuts later this year, according to the latest figures from the Office for National Statistics (ONS) and market commentators.
Latest ONS labour market picture
The ONS’s latest Labour Market Overview shows the UK unemployment rate rising to 5.2% in the most recent three‑month period, its highest level in nearly five years. The number of people unemployed has climbed to around 1.88 million, up by more than 330,000 over the past year, while the employment rate has edged down and economic inactivity remains elevated.
At the same time, annual growth in employees’ average regular earnings (excluding bonuses) slowed to 4.2% in the three months to December 2025, with total pay growth also at 4.2%. In real terms, after accounting for consumer price inflation, pay growth has moderated, indicating that domestic inflation pressures from wages are easing compared with earlier in the tightening cycle.
These data paint a picture of a labour market that is loosening: unemployment is higher, vacancies have plateaued and wage growth is moving closer to a level consistent with the Bank of England’s 2% inflation target.
For the Bank of England, the combination of higher unemployment and softer pay growth will be central to its assessment of when and how quickly to cut interest rates this year. Wage dynamics have been a key concern for policymakers, who have worried that strong pay settlements could keep inflation elevated even as energy and goods prices fall.
The latest pay numbers suggest those risks are diminishing, especially in the private sector, where earnings growth has cooled more noticeably from its 2023–24 peaks. However, the Monetary Policy Committee will want to see confirmation from upcoming inflation data that price pressures are continuing to fade before committing to a faster pace of rate reductions.
Expert reaction: a softening jobs market
Luke Bartholomew, Deputy Chief Economist at Abderdeen, said:
“With unemployment ticking up and payrolls declining again, this is yet another soft labour market report. And crucially, from the perspective of the Bank of England and the outlook for inflation, this weakness is continuing to pull down on wage growth. Private sector pay growth in particular has essentially returned to an inflation-target consistent rate, meaning that as and when inflation falls to 2% later this year it is likely to stay there rather than start increasing again. Of course, the inflation data tomorrow could throw a wrench in the works, but for now it seems there is a clear case for a further rate cut at the Bank’s next meeting in March, and we continue to expect rates to fall to 3% later this year.”
His comments reflect the broad theme in the ONS data: the labour market is no longer exerting the same upward pressure on prices, which helps to anchor expectations that inflation will settle close to target rather than re‑accelerate.
Kevin Brown, savings expert at Scottish Friendly, has commented on this morning’s labour market overview from the ONS:
“This morning’s dip in regular wage growth, now down to 4.2%, marks a clear continuation of the cooling trend that’s been building momentum since last summer.
“Pay growth had already been climbing down from 4.7% since the middle of last year, and a further slowdown in the three months to December bolsters the view that the labour market is losing momentum and that domestic inflation pressures are gradually easing.
“For the Bank of England, that nudges the door further open to rate cuts this year. However, tomorrow’s inflation data will still be decisive in shaping the timing.
“For borrowers, softer wage growth increases the likelihood that interest rates begin to edge lower in the coming months. For savers, this is a potential warning sign. When the Bank of England does decide to make a cut, savings rates can fall quickly and in real terms, inflation still erodes the value of cash over time.
“That makes this a good time to review savings arrangements and, for those with longer-term horizons, to think about investment options that could potentially outpace inflation.”
Brown’s assessment highlights the practical consequences of the data: a weaker wage backdrop supports the case for rate cuts, but also signals that savers need to think carefully about how to preserve the real value of their money if interest rates and cash returns fall faster than inflation.
Jonathan Moyes, Head of Investment Research at Wealth Club said:
“The latest unemployment and wage growth data came in weaker than expected.
Whilst the labour market is clearly weakening, and has been weakening since mid 2024, wage growth has been relatively strong. This has been a perplexing situation for economists, particularly those at the Bank of England. Wages have typically been a blocker on additional rate cuts for fears of stoking inflation. Today’s reading on the health of the economy show thr two key metrics, wages and jobs, starting to move in tandem again.
Will the weakness in wages now trigger the Bank of England to look again at its likely path for inflation? Wage growth may be the last domino to fall as inflationary pressures in the economy appear to be melting away. What’s clear is the economy is weak, employment is weak, and it looks like wages are weak.”
Moyes underlines how unusual it has been to see a weakening labour market alongside robust wage growth, and why the latest alignment between softer jobs data and slowing pay may be a turning point for monetary policy expectations.
What it means for households and businesses
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For households, the figures suggest a mixed outlook: job security is under more pressure as unemployment rises, but the prospect of lower interest rates later in the year could ease mortgage and borrowing costs if the Bank of England gains confidence that inflation will stay on target. Real wage growth is modest and could be squeezed further if inflation surprises on the upside, meaning disposable incomes are unlikely to see a strong rebound in the near term.
For businesses, the loosening labour market may alleviate some recruitment challenges and wage‑cost pressures that have been cited repeatedly as major concerns, but weaker demand and higher borrowing costs continue to weigh on investment and hiring plans. The next key milestone will be the forthcoming inflation release, which will either reinforce or challenge the emerging narrative of a cooling economy and fading domestic price pressures.
