In 2022, the UK job market was incredibly hot. For every unemployed person, roughly one job remained vacant, and over 60% of businesses complained they "couldn't find enough people." In this environment, companies had to continuously raise wages to retain employees, which in turn drove up service prices, creating a vicious cycle of inflation that seemed impossible to stop. However, just two years later, the situation is vastly different.



A significant change is the massive influx of foreign workers. From the end of 2019 to the end of 2024, the number of non-EU citizens working in the UK will almost double. These new workers are primarily concentrated in low-wage sectors that were previously most short-staffed, such as hospitality and catering, and healthcare, systematically alleviating labor shortages in these areas. Meanwhile, the number of EU workers has actually decreased, while only 24,000 new jobs have been created in the UK. This structural shift has directly reversed the previous situation of "labor shortages."

Currently, there are 4 job vacancies for every 10 unemployed individuals, lower than pre-pandemic levels. More importantly, businesses are beginning to show signs of layoffs, with some data even showing that the number of newly closed businesses exceeds the number of new openings. While the quality of some data remains controversial, the overall trend is clear: the labor market is cooling down from overheating. This change is significant because it directly impacts wage growth—and wages are a core driver of inflation.

Private sector wage growth has fallen from 6% year-on-year in January to 3.9% in October last year, and may further decline to 3% in the coming months. If it does reach 3%, it will be lower than pre-pandemic levels. This means that residents' real disposable income is unlikely to improve significantly this year, and the impact of consumer demand on prices will weaken. For the Bank of England, this is a crucial path: as long as wages stop rising sharply, the pressure on service prices will gradually ease.

Will inflation return? Many concerns may be exaggerated.

Many people worry about a repeat of the "inflation storm" of 2022. Back then, soaring energy prices coupled with labor shortages gave businesses and workers the confidence to raise prices and demand higher wages, ultimately turning a one-off shock into long-term inflationary pressure. But the situation is different now. With fewer job vacancies and rising unemployment, both workers and businesses are losing bargaining power in pricing and wage negotiations. Even with rising costs, it's unlikely that the "you raise prices, I raise prices" spiral of the past can be replicated.

Food prices have long been a major concern. Previously, food inflation did indeed increase public perception of overall prices and influence inflation expectations. However, this trend has recently begun to cool. Not only are UK data showing a slowdown in food price increases, but Western and Central and Eastern Europe, regions that typically lead the UK's inflation, are also showing similar downward trends. Furthermore, the UN-compiled food input price index is continuing to decline. This suggests that cost pressures at the global supply chain level are easing, and the supporting role of food prices in overall inflation will gradually weaken rather than continue to drive them higher.

More broadly, service inflation, a key indicator of endogenous inflationary pressure, is also on a clear downward trend. While the process won't be smooth sailing, the direction is certain from multiple perspectives. Rent is a significant component of service prices, and current rent inflation has already clearly declined, with room for further reduction. Due to the lag and persistence of rent adjustments, its impact will steadily manifest in the coming months. Meanwhile, this year's minimum wage increase has been relatively moderate, and with no repeating policy shocks like a payroll tax increase expected in April, upward price pressures on labor-intensive service industries such as restaurants and cafes will also decrease.

Furthermore, the base effect—the high base effect from last year's significant increases in sewage fees and vehicle taxes will be removed from year-on-year comparisons after April—will naturally lower the inflation reading. Overall, with lower energy prices and government efforts to reduce household bills, overall inflation is expected to fall from the current 3.2% to 2% in April and remain around that level thereafter. Once the market establishes a narrative of "stable inflation returning to the target," confidence in further interest rate cuts will increase. However, the pace still depends on whether the Bank of England believes this decline is sustainable.

The direction of interest rate cuts is clear, but the timing remains uncertain.

While inflation and employment are trending in a direction favorable to easing, this doesn't necessarily mean the Bank of England will act immediately. In fact, slowing economic growth alone is insufficient to trigger an immediate rate cut. While UK GDP grew by only 0.1% in the third quarter of last year and is likely to be close to zero in the fourth quarter, seemingly weak, the UK economy has exhibited a pattern of strong growth in the first half and weaker growth in the second half since 2022. This is more likely a result of statistical seasonal adjustment than a sharp deterioration in real economic momentum. Therefore, the mere fact that growth is weak is not enough to persuade the Monetary Policy Committee to accelerate its pace.

A greater constraint comes from internal divisions and a cautious attitude within the central bank. While the last meeting cut interest rates, it also signaled that "the pace of future rate cuts may slow down." Governor Bailey explicitly stated that the pace of rate cuts could be "slowed down," a typical expectation management strategy: with service inflation still above 3% and overall inflation not yet fully anchored, the central bank is unwilling to let the market feel that rate cuts have entered "autopilot" mode, lest it trigger the risk of excessively rapid easing of financial conditions.

Current market pricing reflects this uncertainty. Traders generally believe an April rate cut has been fully priced in, but the probability of a March rate cut is only around 50%. This indicates that the market has not denied the general direction of rate cuts, but rather has a clear disagreement on "when to act." Especially when the committee's opinion is nearing a critical point, the lack of strong new evidence often means maintaining the status quo.

Why is action unlikely in February? Because very little new information will be available then. Of particular concern is that December's services inflation data may temporarily rebound due to the timing of airfare statistics; even if this is merely a technical fluctuation, the central bank may be reluctant to make a swift decision in this context, lest it be misinterpreted as ignoring core inflation risks. In contrast, the situation will be much clearer in March: three new wage data releases will be scheduled, and if wage growth continues to approach 3%, it will be a key factor in pushing more committee members towards a more accommodative stance. Simultaneously, the unemployment rate may rise slightly further, reinforcing the assessment that the labor market continues to cool.

In a highly divided committee, often just one or two members changing their stance can alter the entire policy direction. Therefore, analysts generally believe a more reasonable path would be: hold rates steady in February, implement a rate cut in March, and follow up with another in June. This pace would respond to real-world inflation and employment changes while also adhering to the central bank's "wait-and-see" decision-making logic, avoiding premature mistakes.