With unemployment ticking up and vacancies falling, the latest UK labour market data continues to indicate a weakening labour market. That said, the pace of deterioration is slowing. Revisions also suggest payrolls have been stable since June. On pay, private sector pay growth slowed further in the latest data. It’s now growing at its slowest pace in almost four years. However, total pay growth remains strong, payrolls are stabilising and inflation will hit 4% in September. This means the Monetary Policy Committee (MPC) won’t be tempted into a November interest rate cut.

Is the UK jobs market over the worst?

Starting with the official employment data, UK employment grew by 91,000 in the three months to August. This wasn’t enough to stop the unemployment rate rising to 4.8%. However, this data is from the Labour Force Survey (LFS). While improving, the LFS continues to be distorted by a low response rate.

We must therefore look across a broader set of indicators. When we do, it looks like the bigger story is one of a stabilising jobs market as firms complete their adjustments to April’s payroll tax hike.

On the HMRC payrolls measure, this dropped by 10,000 in September. This was in large part due to a fall in healthcare employment. A proxy for private sector payrolls also suggests private sector employment grew by 8,000. What’s more, initial estimates are often revised up. Indeed, August’s initial 8,000 fall in headcount was revised up to a gain of 10,000. Further revisions to the back data mean that payrolls have actually been stable since June after falling by 43,000 in the three months to June.

In essence, the labour market continues to loosen as vacancies keep falling and the unemployment rate ticks up. However, the pace of loosening has slowed markedly in recent months.

UK pay growth cools, but not enough for cuts?

Turning to pay growth, private sector earnings, excluding bonuses – the measure most important to the MPC because it’s most reflective of underlying inflationary pressures – fell by more than expected to 4.4% from 4.7% in July. This is the weakest reading since December 2021.

It will help to reassure the MPC that the disinflationary trend in pay growth is still underway. Crucially, pay growth is now set to undershoot the MPC’s 4.6% forecast for September, which will encourage some of the more dovish MPC members to vote for another rate cut this year.

However, total pay growth jumped to 5% from 4.8%. Pay growth measures across the board are also still well above the 3% level the MPC thinks is consistent with 2% inflation. Stubborn inflation and easing payroll reductions mean we think the majority of the MPC will want to wait for pay growth to ease further before voting for another interest rate cut.

Once we adjust for inflation, regular pay growth was just 0.6% y/y in August. With pay growth set to ease further and inflation yet to peak a return to stagnant real wages and living standards seems likely, which could drag on consumer spending going forward.

Next rate cut in spring – Autumn Budget permitting

The big picture view is that the doves will – fairly – see a labour market report showing a rising unemployment rate, falling vacancies and a larger-than-expected drop in private sector pay growth as a reason to put a rate cut back on the cards later this year.

However, inflation will hit 4% in September and will stay near that level until next year. Add in a steady, albeit not stellar, economy and stabilising payrolls, and this leads us to think that the MPC will remain on hold in November.

The next opportunity for a rate cut will probably therefore come in February. This is when inflation will be closer to 3%, pay growth will be below 4% and the MPC will have grown more assured that households and firms are not responding to a period of elevated inflation by bargaining for bigger pay awards and raising prices.

That said, the Autumn Budget poses a risk here. If Chancellor Rachel Reeves raises taxes by £25–30bn and can avoid stoking inflation through stagflationary taxes, such as VAT, then we think that a contractionary fiscal event could give the MPC enough cover to cut interest rates in December.

All told, we expect that a recovering labour market and sticky inflation will keep the MPC maintaining a watching brief for the rest of the year to ensure inflation is on a downwards path.

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