UK unemployment falls as inflation revives interest rate rise expectations

Britain’s jobs market has delivered a surprise plot twist: unemployment has fallen to 4.7%, its lowest level since July 2025, despite economists expecting it to rise to 5%. Regular wage growth has also picked up, reaching 3.7%, potentially adding to inflationary pressures. The Bank of England may therefore feel justified in raising interest rates from 3.75% to 4%. But there’s a catch: job vacancies are falling, businesses face rising costs, and the economy could struggle to gain momentum in 2027. Is the labour market resilient, or merely putting on a brave face?

UK unemployment rate falls to lowest level since July last year | Money News | Sky News

1. Explain how the UK unemployment rate is calculated.

2. Assess the likely effects of falling unemployment on workers and firms in the UK labour market.

3. Discuss whether falling unemployment is likely to lead to higher inflation in the UK. Use a short-run Phillips curve diagram in your answer.