UK wage growth decelerated in the three months to June, with total earnings including bonuses falling to 4.1% from 4.3%, according to ONS data. City economists had expected a steeper drop to 4%. The divergence between public and private sector pay tells the real story: private sector growth continues to ease while public sector pay remains elevated, distorted by the timing of NHS pay awards. Regular pay excluding bonuses ticked up slightly from 3.4% to 3.5%, a thin reed of resilience. The labour market is softening around the edges without collapsing. Payrolls fell by 13,000 in July — a smaller decline than recent months — while unemployment held at 4.9% against expectations of 4.8%. Vacancies are falling as small businesses absorb rising employment costs. The picture Liz McKeown, the ONS director of economic statistics, described as "some softening" is more precisely a market that has stopped improving without yet deteriorating. The real danger is in the arithmetic. Real earnings growth stands at 1.3%, but inflation is expected to approach 3% in July, driven by energy bills linked to the Iran war's disruption of global markets. If nominal wage growth continues to decelerate while inflation accelerates, that 1.3% real gain evaporates — and workers start losing purchasing power outright. The vice is closing from both sides. Andy Burnham's government faces this squeeze heading into an autumn budget with no good options. The new prime minister's first-week "breathing space" measures were designed for exactly this scenario, but fiscal room to manoeuvre narrows as energy costs feed through to government borrowing. Pat McFadden, the work and pensions secretary, pointed to employment reforms and a youth jobs grant as structural responses, but these are medium-term plays against a short-term price shock. The youth employment crisis adds a generational dimension. Over a million 16- to 24-year-olds are now classified as NEET — not in education, employment or training — the highest figure in more than a decade. Alan Milburn's review is expected to recommend "turbocharging" internships for young people with special educational needs and new requirements for primary schools to identify children at risk of leaving education at 16 without work. These are supply-side interventions in a demand-side crisis. The structural problem is that the UK economy is absorbing a geopolitical energy shock through household purchasing power rather than through productivity gains or fiscal buffers. Small businesses face rising employment costs and falling vacancies simultaneously — the classic recipe for a hiring freeze that hits young and low-skilled workers first. The government's welfare reforms and youth jobs grants are necessary but insufficient against the scale of the energy-driven squeeze. What matters next is Wednesday's inflation figure. If CPI hits 3%, the real wage growth number turns negative for many workers, and the political pressure on Burnham's government intensifies sharply before the autumn budget. The Iran war has handed the UK a cost-of-living crisis it cannot solve domestically.
