UK unemployment has climbed to its highest level in nearly five years, adding to signs that the labour market is losing momentum and increasing pressure on the Bank of England to cut interest rates.
The jobless rate rose to 5.2% in the three months to December, the Office for National Statistics revealed, up from 5.1% and the highest since early 2021. Economists had expected it to hold steady.
Other worrying signs included youth unemployment jumping to 16.1%, while HMRC data showed payrolled employment falling for a fifth consecutive month.
Average weekly earnings excluding bonuses grew 4.2%, down from 4.6% and below forecasts.
Private sector wage growth, at 3.4%, is now at its lowest rate in five years and, for the first time in two and a half years, is no longer outpacing inflation.
Liz McKeown, director of economic statistics at the ONS, said: “The number of workers on payroll fell further in the final quarter of the year, reflecting weak hiring activity, although it is largely unchanged in the latest month.”
She added that the number of unemployed people per vacancy has reached a new post-pandemic high.
More timely payroll data showed a fall of 11,000 jobs in January, less severe than the 20,000 decline expected. December’s drop was revised up sharply.
Economist Rob Wood at Pantheon Macroeconomics said the figures “suggest sharply fading inflation pressures” and, combined with payrolls softening, said there was enough for the BoE's monetary policy committee "to cut rates in March rather than waiting until April".
Wood and others pointed out that several elements of the jobs data suggest stabilisation, with payrolls falling less than expected, with December’s and November’s payroll changes revised up, and private payrolls falling only 6K month-to-month in January, the smallest drop since January 2025.
Matt Swannell, chief economic advisor to the EY ITEM Club, said the numbers offer some "signs that recent downward momentum might be starting to recede".
He also notes that some members of the BoE's monetary policy committee suggested they were less concerned than before about the strength of pay growth, with settlements nearing a target-consistent pace amid a renewed focus on weak growth and labour market conditions.
The MPC is "likely" to be cut at "one of the next two meetings, but today's data doesn’t offer a clear steer on March or April", Swannel said.
ING’s James Smith noted that weakness remains concentrated in consumer-facing sectors – a legacy of last year’s sizable National Insurance and National Living Wage increases – but outside of these industries, "the story looks more benign".
** UPDATE: Adds more economist comment **