Loose labour market should limit inflationary impact of latest energy-price shock and the need to raise interest rates 

The pace of deterioration in the labour market has eased but it is still in far weaker shape than it was on the eve of the last energy price shock in 2022. This could offer a silver lining by limiting the risk of high inflation and need for interest rate rises, the Resolution Foundation said today (Tuesday) in response to the latest ONS labour market statistics.

The labour market story of 2025 was of rising unemployment and weakening wage growth. The story has changed in recent months, however, with a surprise fall in the unemployment rate to 4.9 per cent in the three months to February. Businesses are struggling to create jobs, though, with the ‘flash’ estimate suggesting payrolled employment fell by 11,000 in March, following a rise of 8,000 in January and a fall of 6,000 in February.

Wage growth has continued to weaken – down to 3.6 per cent in nominal terms in the three months to February – compared to 5.9 per cent a year ago. This is especially true in the private sector, where nominal wage growth has fallen to 3.2 per cent – in line with the Bank of England’s estimate of the rate consistent with achieving its 2 per cent inflation target.

With inflation forecast to head towards 4 per cent as a result of the recent energy price shock, the Foundation warns that workers could soon find their pay packets shrinking again in real terms after experiencing just three years of real wage growth since the last cost of living shock. This is in comparison to workers who enjoyed three decades of uninterrupted real wage growth between the late 1970s and 2008.

The silver lining of elevated unemployment and weak wage growth is that the UK is less likely to see the kind of wage-price spiral it experienced in the wake of Russia’s invasion of Ukraine.

Back in February 2022, the unemployment rate was just 3.8 per cent and private-sector nominal wage growth was 4.9 per cent. In that environment, workers responded to the initial inflation spike after the war by demanding higher wages, driving up inflation even further, and causing interest rates to rise rapidly. That spiral is now much less likely to be repeated in the current labour market environment, the Foundation says.

Hannah Slaughter, Principal Economist at the Resolution Foundation, said:

“Over the course of the past year, unemployment rose while wage growth weakened. And while unemployment remains too high for comfort, it seems to have stopped rising at least for now.

“High unemployment and weak wage growth are not good for living standards. But they come with a silver lining given sharp rises in energy prices as they will help limit the potential for the kind of wage-price spiral we saw back in 2022. This should give the Bank of England pause for thought as it considers whether to raise rates.”