The UK’s unemployment rate has risen to a four-year high, in a surprise deterioration that boosts the case for a Bank of England interest rate cut.

The Office for National Statistics (ONS) reported a rise in the jobless rate from 4.6% to 4.7% in the three months to May.

No change had been expected after the 0.1 percentage point rise seen just last month.

The ONS data, which still comes with a health warning due to poor participation rates, also showed a reduction in the pace of wage rises, with average weekly earnings rising by 5%. That was down from the 5.2% level reported a month ago.

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ONS director of economic statistics, Liz McKeown, said of its findings: “The labour market continues to weaken, with the number of employees on payroll falling again, though revised tax data shows the decline in recent months is less pronounced than previously estimated.

“Pay growth fell again in both cash and real terms, but both measures remain relatively strong by historic standards.

“The number of job vacancies is still falling and has now been dropping continuously for three years.”

The data was released 24 hours after a surprise rise in the rate of inflation, to 3.6%, was revealed by the ONS.

It was seen as muddying the waters as the Bank considers the timing of its next interest rate cut.

But a quarter point reduction, to 4%, is widely expected at the next meeting of the rate-setting committee in early August,

The Bank, experts say, will be looking past the headline inflation numbers and see scope to introduce the third cut of the year due to the softening labour market seen in 2025 – a factor the Bank’s governor Andrew Bailey had suggested would come more into focus in a recent interview with The Times.

Weaker pay awards remain a compulsory element to bringing down borrowing costs as there are fears the UK’s difficulties in bringing down inflation are partly linked to wage growth outpacing price hikes since August 2023.

Add to that the slowdown in economic growth and you have a Bank seemingly grappling the effects of so-called stagflation – as scenario of weak growth with inflation persistently well above the Bank’s 2% target.

While there are conflicting forces at play for the Bank’s interest rate deliberations, rising inflation, coupled with weakening growth and jobs data, are all unwelcome for a chancellor under growing pressure.

Rachel Reeves was accused on Wednesday of contributing to inflation through taxes on employment deployed from April – with industry bodies in the grocery sector claiming an element of rising food price growth was down to businesses passing on those extra costs, alongside hikes to minimum pay requirements.

At the same time, those budget measures have clearly held back hiring since the spring.

One crumb of comfort for her is that the prospect of a rate cut next month remains on – with any reduction helping bring down the cost of servicing government debt as the headroom she has within the public finances remains under severe pressure.

Government U-turns on winter fuel payment curbs and welfare reforms have squeezed her fiscal rules, leaving her to cover likely at the autumn budget to cover shortfalls either through further tax hikes or spending cuts.

Yael Selfin, chief economist at KPMG UK, said of the rate cut prospects: “Slowing activity in the labour market, coupled with pay pressures easing, will likely prompt the Bank of England to lower interest rates next month.

“The impact of April’s tax and administrative changes has led to a marked slowdown in hiring activity among firms. With domestic activity remaining sluggish, the MPC will likely want to provide support via looser policy to prevent a more significant deterioration in the labour market.”

The rate of inflation has risen by more than expected on the back of fuel and food price pressures, according to official figures which have prompted accusations of an own goal for the chancellor.

The Office for National Statistics (ONS) reported a 3.6% level for the 12 months to June – a pace not seen since January last year.

That was up from the 3.4% rate seen the previous month. Economists had expected no change.

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ONS acting chief economist Richard Heys said: “Inflation ticked up in June driven mainly by motor fuel prices which fell only slightly, compared with a much larger decrease at this time last year.

“Food price inflation has increased for the third consecutive month to its highest annual rate since February of last year. However, it remains well below the peak seen in early 2023.”

A key driver of food inflation has been meat prices.

Beef, in particular, has shot up in cost – by more than 30% over the past year – according to Association of Independent Meat Suppliers data reported by FarmingUK.

High global demand alongside raised production costs have been blamed.

But Kris Hamer, director of insight at the British Retail Consortium, said: “While inflation has risen steadily over the last year, food inflation has seen a much more pronounced increase.

“Despite fierce competition between retailers, the ongoing impact of the last budget and poor harvests caused by the extreme weather have resulted in prices for consumers rising.”

It marked a clear claim that tax rises imposed on employers by Rachel Reeves from April have helped stoke inflation.

Balwinder Dhoot, director of sustainability and growth at the Food and Drink Federation, said: “The pressure on food and drink manufacturers continues to build. With many key ingredients like chocolate, butter, coffee, beef, and lamb, climbing in price – alongside high energy and labour expenses – these rising costs are gradually making their way into the prices shoppers pay at the tills.”

Chancellor Rachel Reeves said of the data: “I know working people are still struggling with the cost of living. That is why we have already taken action by increasing the national minimum wage for three million workers, rolling out free breakfast clubs in every primary school and extending the £3 bus fare cap.

“But there is more to do and I’m determined we deliver on our Plan for Change to put more money into people’s pockets.”

The wider ONS data is a timely reminder of the squeeze on living standards still being felt by many households – largely since the end of the COVID pandemic and subsequent energy-driven cost of living crisis.

Record rental costs alongside elevated borrowing costs – the latter a result of the Bank of England’s action to help keep a lid on inflation – have added to the burden on family budgets.

Most are still reeling from the effects of high energy bills.

The cost of gas and electricity is among the reasons why the pace of price growth for many goods and services remains above a level the Bank would ideally like to see.

Added to that is the toll placed on finances by wider hikes to bills. April saw those for water, council tax and many other essentials rise at an inflation-busting rate.

The inflation figures, along with employment data due tomorrow, are the last before the Bank of England is due to make its next interest rate decision on 7 August.

The vast majority of financial market participants, and many economists, expect a quarter point cut to 4%.

That forecast is largely based on the fact that wider economic data is suggesting a slowdown in both economic growth and the labour market – twin headaches for a chancellor gunning for growth and juggling hugely squeezed public finances.

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Professor Joe Nellis, economic adviser at the advisory firm MHA, said of the ONS data: “This is a reminder that while price rises have slowed from the highs of 2021-23, the battle against inflation is far from over and there is no return to normality yet – especially for many households who are still feeling the squeeze on essentials such as food, energy, and services.

“However, while the Bank of England is expected to take a cautious approach to interest rate policy, we still expect a cut in interest rates when the Monetary Policy Committee next votes on 7th August.

“Despite inflation at 3.6% remaining above the official 2% target, a softening labour market – slowing wage growth and decreasing job vacancies – means that the MPC will predict inflation to begin falling as we head into the new year, justifying the lowering of interest rates.”

The chancellor has confirmed she is considering “changes” to ISAs – and said there has been too much focus on “risk” in members of the public investing.

In her second annual Mansion House speech to the financial sector, Rachel Reeves said she recognised “differing views” over the popular tax-free savings accounts, in which savers can currently put up to £20,000 a year.

She was reportedly considering reducing the threshold to as low as £4,000 a year, in a bid to encourage people to put money into stocks and shares instead and boost the economy.

However the chancellor has shelved any immediate planned changes after fierce backlash from building societies and consumer groups.

In her speech to key industry figures on Tuesday evening, Ms Reeves said: “I will continue to consider further changes to ISAs, engaging widely over the coming months and recognising that despite the differing views on the right approach, we are united in wanting better outcomes for both savers and for the UK economy.”

She added: “For too long, we have presented investment in too negative a light, quick to warn people of the risks, without giving proper weight to the benefits.”

Ms Reeves’s speech, the first major one since the welfare bill climbdown two weeks ago, appeared to encourage regulators to focus less on risks and more on the benefits of investing in things like the stock market and government bonds (loans issued by states to raise funds with an interest rate paid in return).

She welcomed action by the financial regulator to review risk warning rules and the campaign to promote retail investment, which the Financial Conduct Authority (FCA) is launching next year.

“Our tangled system of financial advice and guidance has meant that people cannot get the right support to make decisions for themselves”, Ms Reeves told the event in London.

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Last year, Ms Reeves said post-financial crash regulation had “gone too far” and set a course for cutting red tape.

On Tuesday, she said she would announce a package of City changes, including a new competitive framework for a part of the insurance industry and a regulatory regime for asset management.

In response to Ms Reeves’s address, shadow chancellor Sir Mel Stride said: “Rachel Reeves should have used her speech this evening to rule out massive tax rises on businesses and working people. The fact that she didn’t should send a shiver down the spine of taxpayers across the country.”

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The governor of the Bank of England, Andrew Bailey, also spoke at the Mansion House event and said Donald Trump’s taxes on US imports would slow the economy and trade imbalances should be addressed.

“Increasing tariffs creates the risk of fragmenting the world economy, and thereby reducing activity”, he said.