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Britain’s labour market is deteriorating on multiple fronts simultaneously: unemployment has hit a post-pandemic high of 5.2%, vacancies have fallen below pre-pandemic levels, and the ratio of jobless workers to open positions has reached its worst point since 2015. The squeeze is most acute at the bottom of the pay scale, where low-wage job postings are running 20% below their pre-pandemic baseline even as the workforce competing for those roles continues to expand.
Dual Signal: Inflation Falls, Jobs Vanish
Consumer price inflation eased to 3.0% in January 2026, down from 3.4% in December, marking the lowest annual rate since March 2025 (ONS, 18 February 2026). The drop was driven by cheaper motor fuels — petrol fell 3.1p per litre between December and January, with pump prices at their lowest since July 2021 (RAC Fuel Watch) — alongside softer airfares and slowing food price growth, particularly in bread, cereals and meat (ONS).
Core inflation, stripping out energy, food, alcohol and tobacco, slipped to 3.1% from 3.2%, while services inflation — the Bank of England’s preferred gauge of domestic price pressure — edged down to 4.4% from 4.5%, its joint-lowest reading since May 2022 (ONS). The BoE forecasts headline CPI to reach the 2% target by April or May, largely through one-off effects from regulated prices and Autumn Budget measures.
Money markets responded immediately. The probability of a quarter-point rate cut on 19 March rose to 81.5%, up from 77% the previous evening and roughly 65% a week earlier (interest rate swaps data via Yahoo Finance). A Reuters poll of 63 economists, conducted 10–16 February, found over 60% expecting a cut to 3.50% at the March meeting, with Deutsche Bank’s Sanjay Raja forecasting a second reduction in June to bring Bank Rate to 3.25%.
Labour Market Deterioration
The inflation picture would normally be encouraging. But yesterday’s labour market data (ONS, 17 February 2026) told a starkly different story. The unemployment rate climbed to 5.2% in the October–December quarter, the highest since the final quarter of 2020 at the height of the pandemic. Payrolled employees fell by 46,000 over the same period, with early estimates suggesting a further decline in January. Average wage growth also weakened — regular pay rose 0.8% in real terms, excluding bonuses, but the trajectory is downward.
The vacancy picture is equally grim. Total job openings fell to 726,000 in the November 2025–January 2026 period, down 9.2% year-on-year and below pre-pandemic levels for the first time (ONS Vacancies and Jobs, 17 February 2026). The unemployment-to-vacancy ratio reached 2.6 — meaning 2.6 jobless workers competing for every open position — the highest level outside the pandemic since early 2015. A year ago, the ratio stood at 1.9.
The decline has been broad-based, hitting 14 of 18 industry sectors over the year. Construction vacancies collapsed by 32.4%. Wholesale and retail — the sector encompassing the hospitality and food service roles that form much of the low-wage market — shed 94,000 workforce jobs year-on-year, the largest absolute decline of any sector (ONS Workforce Jobs, September 2025).
Low-Wage Squeeze
Indeed’s 2026 UK Jobs and Hiring Trends Report found that postings for low-wage occupations are running roughly 20% below their pre-pandemic baseline — worse than the 14% shortfall for high-wage roles. The same report documented a decline in employer-offered benefits, with the share of postings advertising at least one benefit dropping to 64.6% from 66.7% a year earlier, suggesting firms are scaling back as competition for talent eases and employment costs mount.
The Autumn Budget’s increase to employer National Insurance contributions, which took effect in April 2025, is widely cited as a hiring brake. Over half of UK firms have delayed pay rises to manage the higher costs (ManpowerGroup Employment Outlook Survey, Q1 2026). For hospitality and retail operators already working on thin margins, the NIC increase has compressed the calculus around every new hire — and April 2026 brings further pressure.
From 1 April, the National Minimum Wage for 18–20-year-olds rises 8.5% to £10.85 per hour, while the National Living Wage for workers aged 21 and over climbs 4.1% to £12.71 (Low Pay Commission, accepted in full by government). The combined two-year compound increase since April 2024 exceeds 11% — a permanent reset in baseline labour costs. For employers advertising near-minimum-wage roles, the gap between entry-level pay and supervisor pay continues to narrow, creating wage compression that discourages internal progression and increases churn.
Rate Cut Expectations and What Comes Next
The convergence of cooling inflation and a weakening labour market has shifted the monetary policy debate decisively. The BoE’s February meeting produced a knife-edge 5–4 vote to hold at 3.75% — far narrower than the 7–2 split most City analysts had expected. Governor Andrew Bailey, who voted to hold, acknowledged that further cuts are “likely” if inflation remains on track.
Morningstar’s international economist argues the BoE will ultimately deliver more easing than currently priced, noting that price growth should “largely normalise in the second half of 2026.” Capital Economics forecasts rates falling to 3.0% by year-end. But BoE Chief Economist Huw Pill has pushed back, cautioning that underlying inflation remains stuck around 2.5% — above target-consistent levels.
For the millions of workers at the bottom of the pay scale, rate cuts offer no direct relief. What the data describe is a structural mismatch: employers face rising wage floors and higher NICs while simultaneously cutting vacancies, forcing an ever-larger pool of applicants through increasingly competitive hiring processes for a shrinking number of positions. The Net Employment Outlook for Q1 2026 stands at +13% — the first improvement since Q2 2025 (ManpowerGroup) — but 76% of employers still report difficulty filling roles, suggesting the problem is less about the quantity of workers and more about the cost of employing them.
