UK Wage Growth Eases as Middle East Conflict Pushes Up Living Costs

Economic snapshot

UK wage growth slowed in June as households and businesses felt growing pressure from higher living costs driven in part by the ongoing conflict in the Middle East. Official Office for National Statistics (ONS) figures show annual growth in average earnings including bonuses fell to 4.1% in the three months to June 2026, down from 4.3% in the three months to May, though modestly above the 4.0% many analysts had expected.

Excluding bonuses, average annual earnings growth was 3.5% for the same period. The public sector continued to lead overall pay growth: annual regular earnings there rose 6.1%, a figure influenced by the timing of pay awards this year. Private sector regular pay growth lagged at 2.8%.

The slowdown in headline wage momentum comes against a backdrop of rising household bills. The ongoing Iran war has contributed to a surge in energy prices across the UK and much of Europe, and official data expected later this week were likely to show UK inflation approaching 3% in July after a sharp rise in energy costs.

Higher utility bills are not limited to energy. Much of the UK is in drought, prompting the water regulator Ofwat to consider so-called surge pricing higher tariffs for water usage in summer months or when customers cross usage thresholds which could push some households bills up further.

The Bank of England is monitoring these developments closely. Officials have flagged the possibility of raising interest rates as early as September to prevent inflation becoming more persistent, a move that would tighten financial conditions for households and businesses.

Labour market and vacancies

Labour market indicators showed softening demand for labour. Vacancies fell to an estimated 707,000 in the May to July 2026 period, a decline of roughly 6,000 jobs or 0.8% compared with February to April. Vacancies fell in nine of 18 industry sectors, with human health and social work down by about 5,000 roles and education down by around 4,000.

Payrolled employees those on payroll schemes slipped by 86,000 year-on-year (a 0.3% fall) in the three months to June, and by 37,000 (0.1%) on a quarter-on-quarter basis. The data point to more cautious hiring among firms, particularly smaller businesses.

Danni Hewson, head of financial analysis at AJ Bell, said small firms are buckling under the pressure of increased costs and that recent changes to employment law have made hiring riskier. She added that big jumps in public sector pay and the timing of those increases have boosted headline wage numbers, a factor Bank of England rate-setters will weigh when they next meet.

Policy and political context

For the new government led by Andy Burnham, the economic picture underlines a challenging policy agenda: easing cost-of-living pressures for households and supporting businesses ahead of what is expected to be a difficult autumn budget. Policymakers must balance support measures against the need to guard against higher inflation becoming entrenched.

With inflation likely to have been pushed up by energy prices related to the Middle East conflict, and with water bills potentially rising in a drought-hit summer, the economic pressures facing households are mounting. That combination softer private-sector pay growth, still-elevated public-sector pay awards, and rising bills will be central to debates in Westminster and at the Bank of England over the coming weeks.

For consumers and businesses, the immediate outlook is one of tighter finances and greater uncertainty. Interest-rate decisions, energy markets and the path of the Middle East conflict will all be watched closely as the UK heads into autumn.