20 May 2026: The UK unemployment rate unexpectedly rises to 5%

UK unemployment has risen to 5%, but with an important context: the rate increased year on year yet decreased slightly in the quarter, signalling a labour market that is softening but not collapsing.

The Office for National Statistics reports the unemployment rate at 5.0% for January–March 2026, up 0.5 percentage points compared with a year earlier. The CBI figures confirm this 5.0% figure and highlight that it is higher than last month’s 4.9%, reflecting a gradual upward drift. Vacancies have fallen to a post-pandemic low of 705,000, signalling weaker demand for labour.

The Office for Budget Responsibility has warned that rising unemployment is being driven mainly by reduced hiring, which disproportionately affects young people entering the workforce. The data also shows that wage growth is slowing, and real-term pay is barely rising (0.1% for regular pay, excluding bonuses).

The Office for National Statistics has surprised economic commentators by revealing that the UK economy grew by 0.6% in the first quarter of the year, following very modest 0.2% growth in Q4 2025. While this percentage is higher than expected, the war in the Middle East appears to have already prevented Q2 from building on its successes.

The report reveals that, after showing signs of recovery earlier in the year, permanent hires in the UK declined more rapidly in April. They’ve been declining just as temporary hires have increased for the first time in three months, providing a clear signal that British enterprises are adapting to economic uncertainty by making their workforces more flexible.

However, economic factors aren’t the only reason why businesses are turning to temp workers, with recruitment analysts suggesting that the growth of AI may also be playing a role.

Rachel Reeves is trying to impose price caps on supermarkets through backroom negotiations, according to the FT.

The Treasury is pressuring major supermarkets to cap prices on essentials voluntarily. Rachel Reeves is said to hope to announce the policy alongside a cost-of-living package tomorrow. In exchange, Labour is apparently offering regulatory “incentives”, including easing packaging rules and delaying healthy food regulation.

Supermarkets are furious and call it a knee-jerk reaction to the SNP’s similar scheme, announced earlier by its leader, John Swinney, which has been roundly dismissed as a 70s-style gimmick. Reeves has also demanded guarantees that farmers wouldn’t lose income from the caps.

The measures will apply to staple foodstuffs such as bread, eggs, milk, and cheese.

Markets are nervous about Burnham’s fiscal stance should he become Prime Minister in the coming months. Gilt yields have risen above 5%, with Conservatives branding this the “Burnham penalty” and arguing that speculation about his leadership bid has already increased borrowing costs. Any incoming Chancellor would inherit a bond market primed to scrutinise every fiscal move.

Burnham has argued that Britain is “in hock to the bond markets” and has attacked the current fiscal framework. A Chancellor under him would be expected to deliver a fiscal strategy that breaks with orthodoxy while calming the very markets Burnham has antagonised. This assumes Burnham would be a “new broom”, sweeping away the deeply unpopular current Chancellor.

Sterling, having received a boost from the delay of Trump’s return to open conflict with Iran. returned to its familiar pattern of losses yesterday. It fell to a low of 1.3378, driven by rising bond yields and broader concerns about stagflation, before closing at 1.3395.

Artificial intelligence can improve efficiency within Central Banks, but strict safeguards are also needed, according to Federal Reserve Governor Christopher Waller.

Waller spoke at a policy panel before the International Research Forum on Monetary Policy, organised by the Euro Area Business Cycle Network, the European Central Bank, and the Federal Reserve Board.

When asked about the use of AI in research at Central Banks, he said they have viewed it only as a tool to increase productivity.

"We're not putting it in to replace jobs. That is not our intent."

When asked about feeding sensitive data into AI tools, he said, "You don't get to just put anything in you want. You also don't get just to run some output and then copy and paste it into a policy document." There are humans on the FOMC board better qualified to make those decisions.

He went on to say that there is a need to do more to centralise operations at the 12 Reserve Banks into national lines of business.

"I see no reason to reduce the number of Reserve Banks or alter their geographic boundaries. Each Bank President still has an independent voice at the FOMC on the appropriate course of monetary policy, and that should continue," he said.

"At the beginning, everything a Reserve Bank did was 'local '; no national functions were performed," said Waller.

"This decentralised approach made more sense when the economy and the banking system were much more regional in nature, but as finance and the economy became more national in scope, changes were needed," added the Fed governor.

"In this era, Reserve Banks operated under a clear 'Bank first, System second' mindset," he noted.

"Over the decades, as technology changed and U.S. financial sector regulation evolved, the external environment began to shift in important ways," Waller said.

The new US Federal Reserve Chairman, Kevin Warsh, will be sworn in on Friday at the White House in a ceremony hosted by President Donald Trump, the Administration has said.

Warsh was confirmed by the US Senate last Wednesday to lead a Central Bank whose independence is under scrutiny by Trump. Adding to Warsh’s challenges, inflation is at a three-year high, making any consideration of rate cuts difficult.

It is unusual for the chairman of the Federal Reserve, which is supposed to be an independent body, to be sworn in at the White House. The last to do so was Alan Greenspan, nominated by Ronald Reagan in 1987.

Warsh will have to navigate working with a President determined to exert influence over monetary policy and who has relentlessly berated outgoing chief Jerome Powell. Once known as a monetary hawk against inflation, Warsh has shifted in line with Trump’s push for lower interest rates. This stance poses an unprecedented challenge to the Fed’s independence.

Warsh, confirmed for a four-year term, previously served on the Federal Reserve Board of Governors from 2006 to 2011. He is already facing criticism from the Democratic opposition, with Senator Elizabeth Warren calling him a “sock puppet.” The transition period from Powell to Warsh has been fraught with friction.

Warsh’s first FOMC meeting will take place on June 16/17 and include a summary of economic projections. There is a clear groundswell of opposition to any statement that is anything other than hawkish.

Based on the latest data, markets overwhelmingly expect the Federal Reserve to refrain from hiking rates in June 2026. The dominant probability is for a hold, with only a very small chance of a hike. It will be interesting to see whether Warsh follows Powell’s approach, aiming to be data-driven, or employs his own style.

The dollar index rallied yesterday as the markets were driven by fears that the conflict in Iran will recommence imminently, raising risk aversion. It reached a high of 99.43, erasing its losses from the previous session, before closing at 99.31.

European Central Bank President Christine Lagarde addressed the recent turmoil in global bond markets with characteristic candour, saying that concern for financial stability is inherent to her role. Her remarks came at a press conference following the EU Finance Ministers' Summit in Paris, as yields on eurozone government bonds surged to multi-year highs.

When asked by a journalist whether she was worried about the sharp sell-off in sovereign debt markets, Lagarde replied, ‘I always worry; that’s my job.’ The comment, delivered with a slight smile, underscored the Central Bank’s vigilance as borrowing costs for several eurozone members climbed rapidly. The sell-off, which began in late February, has been driven by stronger-than-expected economic data, persistent inflation, and a global reassessment of Central Bank rate paths.

Speaking after a meeting of G7 ministers, Finance Minister Roland Lescure said the talks were 'frank, sometimes difficult, direct,' amid geopolitical tensions affecting the global economy, notably due to a blockade on the Strait of Hormuz.

"We have had frank, sometimes difficult, direct discussions to find long-term and short-term solutions to major global economic challenges to guarantee economic stability," Lescure said after a meeting of G7 finance ministers, including US Treasury Secretary Scott Bessent. However, the final communique from the G7 ministers reaffirmed "our commitment to multilateral cooperation in addressing risks to the global economy."

The recent rout has pushed yields on 10-year German Bunds, the eurozone benchmark, up by more than 30 basis points in a matter of weeks. Economies with a “tradition” of higher rates, such as Italy and Spain, have seen even sharper increases, reigniting concerns about debt sustainability in the region. Analysts attribute the move to a ‘risk-off’ sentiment in global markets, driven by the situation in Iran and compounded by uncertainty over the pace of ECB quantitative tightening.

Bundesbank President and ECB Governing Council Member Joachim Nagel said yesterday that the European Central Bank may need to respond to economic challenges stemming from the conflict in the Middle East.

“This energy supply shock is more persistent, so we are moving away from our baseline scenario,” Nagel told Bloomberg Television yesterday. “It means we may have to do something.”

Asked whether that could mean an increase in borrowing costs at June’s monetary-policy meeting, Nagel said he and his colleagues will decide based on data. Still, the likelihood that price pressures will spread is growing.

“The probability is rising that we will see more inflation everywhere,” he said. “This is something we have to take into consideration, and we will do this at our next meeting.”

The ECB has signalled it will consider raising rates as the war-induced surge in energy costs pushes inflation further beyond its 2% target. But some officials still urge caution, as costlier oil and gas weigh on economic activity, reducing the risk of “second-round” effects.

There is hardly a sector of the German economy that is unaffected by the war in Iran; many are grappling with high raw material and energy prices or stalled supply chains. The war has even taken a toll on road construction.

Soaring asphalt prices are putting increasing pressure on road construction projects across Germany.

The key driver is the sharp rise in bitumen costs, a crude oil–based binding agent essential for asphalt production, amid geopolitical tensions linked to the war in Iran and rising global energy prices.

With bitumen now costing nearly €700 per ton, production costs have doubled in a short time, disrupting long-term contracts negotiated at fixed prices.

Industry representatives warn that price hikes of 20-40% could make road building economically unviable, threatening smaller construction firms and delaying infrastructure projects nationwide.

The situation reflects broader risks facing the German economy, from volatile raw material markets to fragile global supply chains.

The Euro lost ground yesterday as the dollar index rose. It fell to a low of 1.1592 and closed at 1.1605. It is likely to challenge support at 1.1590, as risk aversion remains a key driver despite hawkish comments from the ECB.

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