ON the face of it, this week’s unemployment figures looked like good news.

However, scratch the surface of the solid-looking headline numbers and developing weaknesses reveal themselves.

And the EY ITEM Club’s take on the data was eye-catching – with the think-tank highlighting its belief that the Bank of England’s Monetary Policy Committee would take “the state of the jobs market as a reason to continue raising interest rates”.

This will not be what under-pressure households with significant borrowings affected by movements in base rates want to hear at all right now, amid the inflationary pressures they face. However, it seems like a shrewd observation from the EY ITEM Club, as the Bank of England continues to face an extremely difficult balancing act on the monetary policy front.

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The Old Lady of Threadneedle Street has already raised UK base rates from a record low of 0.1 per cent late last year to 1.75%, with further significant increases predicted by economists amid the inflation crisis.

The UK unemployment rate on the International Labour Organisation measure fell to 3.6% in the three months to July – the lowest since May to July 1974 – figures published on Tuesday by the Office for National Statistics showed. This was down from 3.8% in the previous three months.

However, before we breathe a sigh of relief that things are not much worse on the employment front given the UK’s cost-of-living crisis and amid the continuing damage from Brexit, it is important to realise the unemployment rate is a lagging indicator of the economy’s performance.

Amid the inflation crisis, the Bank of England forecast last month that the UK unemployment rate on the ILO measure would rise to about 6.3% by the third quarter of 2025. This would be about 75% higher than the current rate of 3.6%.

Estimates of the peak differ, of course, and it may be the woefully belated support package on energy prices announced last week for households and businesses by Prime Minister Liz Truss results in a less-bad outcome than otherwise.

However, it does seem clear that unemployment will soon be heading in the wrong direction, making already very difficult economic times even worse.

The Bank of England last month forecast the UK would fall into recession in the fourth quarter of this year.

In spite of the rapid deterioration in the economic outlook, the Bank’s Monetary Policy Committee hiked UK base rates by a further half-point to 1.75% in August.

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Announcing the rate rise on August 4, the Bank said: “The labour market remains tight, and domestic cost and price pressures are elevated. There is a risk that a longer period of externally generated price inflation will lead to more enduring domestic price and wage pressures. In view of these considerations, the committee voted to increase Bank Rate by 0.5 percentage points, to 1.75%, at this meeting.”

Although noting “policy is not on a pre-set path”, and that “the scale, pace and timing of any further changes in Bank Rate will reflect the committee’s assessment of the economic outlook and inflationary pressures”, the Bank added: “The committee will be particularly alert to indications of more persistent inflationary pressures, and will if necessary act forcefully in response.”

Data published on Wednesday by the ONS showed annual UK consumer prices index inflation had fallen from 10.1% in July to 9.9% in August, with a slight easing of petrol prices. However, it remains around five times the 2% target set for the Bank of England by the Treasury.

The Bank declared last month that annual CPI inflation “is expected to rise further and peak at just over 13% in 2022 Q4”.

This, however, took in a forecast that the typical annual household fuel bill would rise by about 75% from October. Bills are going to rise sharply from next month but the increase, based on Ms Truss’s intervention which will see the price cap leap from £1,971 to £2,500 (and stay there for two years), is actually now 27%.

This is obviously a colossal rise, coming on top of a 54% leap in the annual energy price cap for dual fuel for a typical household from April 1.

While it is not as bad as what had been feared, it will cause huge problems for millions of households, and it would seem likely it will weigh heavily on consumer spending given the hole blown in budgets by the surge in energy bills.

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Of course, the surge in interest rates is already putting significant pressure on the finances of millions of households.

It is interesting to note that the Bank of England highlighted its belief last month that the labour market “remains tight”.

Martin Beck, chief economic adviser to the EY ITEM Club, made some important points this week about how the underlying situation in the labour market is not quite as strong as might be suggested by the very low headline unemployment rate.

He observed: “The decline in joblessness disguised what was only a modest 40,000 rise in employment, the smallest since January to March, with a rise in inactivity playing a bigger role in pushing unemployment down.

"Moreover, the single-month data showed the number in work in July falling on three months earlier to the greatest extent since January 2021. This suggests that the weak economy is starting to have an adverse effect on the jobs market.”

Mr Beck saw “mixed messages” regarding the tightness of the jobs market given the increase in inactivity and a further fall in job vacancies “albeit from very high levels”.

However, he noted total pay growth accelerated to 5.5% year-on-year in the three months to July, “which errs on the still very tight side”. Year-on-year pay growth in the three months to June had been 5.2%.

The Bank of England put back the MPC meeting scheduled for this week to next week because of the period of national mourning following the death of the Queen. The committee’s decision on base rates will be announced at noon next Thursday.

Looking ahead to this meeting, Mr Beck said: “The EY ITEM Club expects that the significantly faster growth in pay than the pre-Covid norm will probably carry more weight in the MPC’s thinking in advance of next week’s monetary policy decision than the weakness of employment growth or the fall in vacancies.

“The forthcoming energy price cap for businesses should cut the risk of a substantial rise in redundancies, which also points in a hawkish direction for interest rates. The EY ITEM Club expects unemployment to rise, but anticipates a softer landing compared to past economic downturns. So, on balance, the MPC is likely to take the latest developments in the jobs market as a reason to continue raising interest rates.”

A poll published by news agency Reuters on Tuesday showed economists expect a further half-point rise in base rates next week, and revealed a view that the MPC could even opt for a bigger move.

Whatever the outcome, mulling the outlook for unemployment and expectations of further hikes in borrowing costs, it is difficult to see much if anything in the way of silver linings for hard-pressed households as far as the eye can see.