UK pay growth slows as Iran war prompts cost of living squeeze

Iran war prompts cost of living squeeze for workers as ONS reports unemployment rate stays at 4.9%

Wage growth in the UK slowed in June and vacancies hit a five-year low as workers came under pressure from a renewed cost of living squeeze amid the economic impact from the Iran war.

Figures from the Office for National Statistics show average growth in total earnings, including bonuses, fell to 4.1% in the three months to June, down from 4.4% in the three months to May.

The pay slowdown could deter the Bank of England from raising interest rates this year, some economists suggested.

Liz McKeown, the ONS director of economic statistics, said the data showed “some softening” in the jobs market despite a broadly unchanged picture overall, in a potential sign of stabilisation after a sharper slowdown earlier this year.

“Regular wage growth has remained broadly stable in recent months. However, private sector pay growth has continued to ease, while public sector pay growth remains elevated due to the timing of the latest NHS pay awards,” she added.

Pay growth excluding bonuses strengthened slightly from 3.4% to 3.5%. City economists had forecast the rate would remain unchanged. The number of workers on company payrolls fell by 13,000 in July, matching the decline in June after larger falls in previous months.

However, earnings growth, excluding bonuses, in the private sector slowed to 2.8%, the weakest growth rate since October 2020. Pay growth in the public sector strengthened to 6.1%, reflecting the payment of NHS staff pay rises earlier in 2026 compared to 2025, which distorts the figure.

Vacancies fell to a five-year low as small businesses warned they were facing a rise in employment costs. There were 707,000 in May to July, a drop of 6,000 compared with the previous three months and the lowest level since spring 2021.

“Ongoing weakness in private sector hiring and wage growth suggests the bar is still relatively high for a rate hike in 2026, barring a severe and prolonged spike in energy prices,” James Smith, a developed markets economist at the Dutch bank ING, said.

Modupe Adegbembo, an economist at the investment bank Jefferies, said there was little in the data to make the Bank of England more worried about labour-market-driven inflation pressure.

“Whilst the adjustment still looks orderly rather than disorderly, we think the BoE will remain cautious around the state of the labour market,” Adegbembo added.

Money market pricing shows City economists expect one increase in UK interest rates by the end of the year, which would lift the Bank rate from 3.75% to 4%.

The headline rate of unemployment remained unchanged at 4.9%. City economists had forecast a drop to 4.8%.

The snapshot comes as households face a fresh hit to living standards as the fallout from the Middle East conflict rattles the world economy. Official figures due on Wednesday are expected to show that a rise in energy bills drove UK inflation close to 3% in July.

Annual growth in earnings after taking account of inflation was 1.3% in the three months to June. However, workers could face a squeeze as rising inflation approaches the slowing rate of earnings growth.

The figures highlight the challenge for Andy Burnham’s government to ease the financial pressure on households before a difficult autumn budget.

The new prime minister used his first week in office to announce a series of “breathing space” measures to ease the cost of living, and he has promised to combat unemployment as young people bear the brunt from recent higher rates of joblessness.

Ministers are awaiting a review into youth jobs from Alan Milburn, the former Labour cabinet minister, after the number of 16- to 24-year-olds not in education, employment or training (Neet) surpassed a million earlier this year for the first time in more than a decade.

Before a final report this autumn, Milburn told the Guardian this week that he would call on the government to “turbocharge” the provision of internships for young people with special educational needs.

Earlier this month he told this newspaper he would recommend new requirements for English primary schools to take steps to identify children at risk of leaving education at 16 without finding a job.

Pat McFadden, the work and pensions secretary, said: “It’s encouraging to see signs of progress in the latest figures, with employment on the up and a continued fall in unemployment rate.”

He said the government had put in place measures to overhaul the benefits system and to support people to find work, including a youth jobs grant to encourage businesses to hire young people.

“We will continue to reform welfare and employment support so that more people can live independently and restore opportunity across the country,” he added.

Economists said the figures showed signs of a slowing jobs market that could strengthen the case for the Bank of England to hold back from raising interest rates.

Threadneedle Street has signalled that a weaker backdrop in the labour market could help limit the capacity for stubbornly high inflation becoming entrenched in the economy.

Jake Finney, a senior economist at PwC UK, said: “On the face of it, the latest labour market report looks relatively benign. Unemployment, employment and inactivity remain broadly stable, while vacancies edged down but are essentially levelling off. The jobs market remains soft, but it isn’t collapsing.”