The Iran energy crisis spells bad news for UK workers
The surge in global energy prices triggered by the conflict in the Middle East could lead to reduced hiring activity in the UK, compounding concerns over the labour market and rising unemployment.
The Bank of England’s Monetary Policy Committee (MPC) voted on Thursday 19 March against slashing interest rates as inflation risks rise on the back of the outbreak of hostilities between Iran, Israel, and the United States.
As a result of this conflict, shipping through the Strait of Hormuz has been almost completely halted, causing global oil and natural gas prices to soar, affecting economies worldwide. This has caused CPI inflation projects to remain high, which KPMG UK vice chair and chief economist Yael Selfin said could lead to further loosening in the UK labour market.
“This could see interest rates staying higher for longer, raising the prospect of a more pronounced loosening in the labour market over the coming months,” Selfin said.
“Despite the rise in energy costs, pay pressures will likely ease further in the months ahead. Demand for labour is weak, which should curtail workers’ bargaining power and limit the scope for a pick-up in wage growth.”
As a result, KPMG expects headline pay growth in the UK to fall to around 3% by the end of the year, which will come as unwelcome news to workers faced with rising food and energy bills driven by inflation.
Poor wage growth and projections of rising unemployment
The latest figures from the Office for National Statistics (ONS) show that what little wage increases workers have received have been eaten away by inflation.
When adjusted for inflation using the CPIH measure (which includes owner-occupiers’ housing costs), real regular pay grew by just 0.4%, and real total pay by 0.5%.
Additionally, while public sector earnings saw more robust growth of 5.9% annually, private sector workers only saw their wages grow by just 3.3% over the past year.
While unemployment has stayed relatively stable according to the latest data, Selfin said the sustained high rate of inflation and energy crisis could lead to more Britons being out of work.
“The unemployment rate was unchanged at 5.2% in the three months to January but could potentially rise further over the coming months,” she said.
“Downside risks for the labour market have become more pronounced with the combination of a sluggish domestic economy and higher energy prices increasing costs for businesses.”
“Firms may look to pass on some of this cost to consumers, and it could also slow hiring activity further in the near term,” Selfin said.
This outlook compounds already poor UK labour market metrics released by the ONS, with payrolled employees falling by around 0.4% over the last year and the number of vacancies declining slightly in the beginning of 2026.
