# What more evidence do the hawks need?

_A pact offered in Downing Street on Monday, a labour market that shrank again on Tuesday, and inflation on Wednesday with no second-round effects anywhere in it. The Committee votes on Thursday._

Neil Woodford · 16 September 2026 · 9 min read

![Hawk with a blindfold](https://cdn.sanity.io/images/v3acfbvo/production/bcabc79f2e644dad8069790e196880d2fba4a68e-2592x1944.jpg?w=1600&fit=max&auto=format)

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Three members of the Monetary Policy Committee are likely to vote for higher rates on Thursday, and nothing that I’ve seen published this week gives them a reason to.

Private sector pay growth has fallen below 3%, from 4.6% a year ago, and core inflation is a full percentage point lower than it was last August. Headline inflation did rise in August, from 2.9% to 3.1%, but that was petrol and diesel and very little else. Underneath it is an economy that has shed payrolled jobs in every one of the last thirteen months. The Chancellor spent Monday evening in Downing Street, telling Britain's largest companies that his government is on their side.

Tuesday's labour market data was released against a particularly interesting backdrop which I couldn't let pass without comment. The context was that the evening before, the Chancellor, John Healey, [hosted a reception at Downing Street](https://www.cityam.com/burnham-to-call-for-culture-shift-as-he-meets-top-british-business-chiefs/) in what to me looks like another attempt to try and build this government's business-friendly credentials. 

Apparently, the Chancellor thought that it was a good idea to offer a “pact” to the businesses represented at the meeting (according to the FT, 100 businesses were represented, mostly large household names) where, in return for “fiscal and economic discipline” he asked for, to paraphrase, investment, innovation and more training and employment. The other offer was that perennial favourite promised by countless politicians over the years, a reduced regulatory burden.

Andy Burnham had been due to host it and pulled out after the death of his father, so Mr Healey took [the chief executives of BP, Shell, HSBC, Standard Chartered, BT and Vodafone](https://live.euronext.com/en/financial-news/uk-government-hosts-meeting-business-leaders-discuss-growth) instead.

_[Embedded media](https://www.cityam.com/burnham-to-call-for-culture-shift-as-he-meets-top-british-business-chiefs/)_

None of it was new. [His growth speech the previous Monday](https://www.gov.uk/government/speeches/chancellor-john-healeys-growth-speech-2026) contained the same asks and the same offer, including a commitment to “reducing the burden of business regulation by 25% by the end of this Parliament” and the assurance that “fiscal discipline was my first priority as Chancellor”. I wrote about that speech at the time.

_Last week:_ [The new Chancellor’s misdiagnosis](https://www.noisecancelling.co/read/the-new-chancellors-misdiagnosis) — John Healey's first major speech as Chancellor, delivered in a Coventry factory weeks before his budget, was a torrent of platitudes rather than an accurate diagnosis of what ails the economy.

## A bizarre exercise in bartering

A number of things struck me about this rather odd gathering of the great and good. The first, I suppose, is that the Chancellor thought it would be a good idea to offer fiscal and economic discipline as a kind of macro-economic trade for what he wanted from business. I would have thought any sane Chancellor would know fiscal and economic discipline were a given for any government, not optional extras to be offered up in some bizarre exercise in bartering with the private sector.

To illustrate how asinine this was, I wonder whether, in the future, if the Chancellor decided the businesses attending hadn’t delivered their side of the so-called bargain, that would give him a perfect excuse to be economically and fiscally undisciplined? Or, I wonder, has the Chancellor given each business attending a specific target for investment, innovation, training, and employment to measure against? And what about the other [5.7mn small and medium sized businesses in the UK](https://www.gov.uk/government/statistics/business-population-estimates-2025/business-population-estimates-for-the-uk-and-regions-2025-statistical-release), are they not included in this weird trade?

_[Embedded media](https://x.com/JohnHealey_MP/status/2097393833973551131)_

## Listening and hearing

Maybe I'm missing the point, and this high-profile political genuflection at a selection of big businesses was in fact an opportunity for them to have a fireside chat with the government about its disastrous first two budgets, the massive tax increases, or its record of fiscal incontinence, or excessive re-regulation of the labour market or the pain inflicted on the retail and the leisure industries by [what it has done to business rates](https://www.gov.uk/guidance/business-rates-relief-202526-retail-hospitality-and-leisure-scheme).

I wonder if any of the execs attending were minded to point out that massively increasing the cost of employing people through [the increases in employers' NI](https://www.gov.uk/guidance/rates-and-thresholds-for-employers-2025-to-2026), or [the minimum wage](https://www.gov.uk/national-minimum-wage-rates) or [changing employment law](https://www.legislation.gov.uk/ukpga/2025/36) were antithetical to more employment and more training?

Although the government PR machine talked about robust conversations, in reality this was an exercise in demonstrating that the government is listening to the needs of business. My summary is that there is a big difference between listening and hearing, and so far, there is little evidence of the latter. Judged by their actions rather than their words, this government has failed on every count, and the evidence of that failure was once again evident in the labour market data published on Tuesday morning.

## Labour market data

![The labour market in four numbers](https://r4at4qm6kmohrtvq.public.blob.vercel-storage.com/charts/chart-labour-sep26-summary-8f72687710d5-light.png)

_Four numbers and none of them flattering. The rate is where it has sat since February; everything underneath it is still deteriorating._

First to the data. [Payrolled employment fell in July](https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/uklabourmarket/september2026) and year on year. But most notably in the hospitality sector of the economy, which [lost 2.8% of its payroll over the year](https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/earningsandworkinghours/bulletins/earningsandemploymentfrompayasyouearnrealtimeinformationuk/august2026), the largest fall of any sector. That is the part of the economy carrying the employers' NI increase, the minimum wage and the business rates change all at once, which I doubt is a coincidence. On the three-month measure the payroll has now fallen in every one of the last thirteen months. _(Neil in the margin: “Three-month change” on the payroll means the latest three months averaged against the previous three, not July against April. It is the smoothing the ONS applies to what is otherwise a noisy monthly series, and it is why a fall of 0.1% is a smaller number than the month-to-month swings.)_

![Thirteen months, thirteen falls](https://r4at4qm6kmohrtvq.public.blob.vercel-storage.com/charts/chart-labour-sep26-payroll-5855890beb8d-light.png)

_Not one positive month. The payroll has been shrinking on this measure since the summer of 2025, and July is the largest fall in the run._

_[Embedded media](https://x.com/FT/status/2089605091426722249)_

One complication is worth understanding, because the two measures of employment disagree. Labour Force Survey employment increased by 0.2% in the three months to July and was 0.7% higher than a year earlier. The payroll says the opposite. _(Neil in the margin: The two counts are built differently. Payrolled employment comes from HMRC's PAYE records, which is close to a census of employees. The Labour Force Survey asks a sample of households whether they worked, so it captures the self-employed too, but it carries survey error and its response rate has been poor since the pandemic. When they disagree, I would follow the payroll on direction.)_

![Two measures of employment, moving in opposite directions](https://r4at4qm6kmohrtvq.public.blob.vercel-storage.com/charts/chart-labour-sep26-measures-926857e29ec9-light.png)

_The survey says employment is up 0.7% on the year, the payroll says it is down 0.3%. The payroll is a near-census of employees; the survey is a sample with a response-rate problem. I know which I believe on direction._

### Nine million people outside the labour force

Unemployment also rose slightly, as did the unemployment rate, which is at 4.9% against 4.7% a year ago. The participation rate was 63.8%, slightly lower than at the beginning of the year.

![82,000 more people unemployed than a year ago](https://r4at4qm6kmohrtvq.public.blob.vercel-storage.com/charts/chart-labour-sep26-unemployment-6b7246eb72ab-light.png)

_The rate has been flat at 4.9% for four months, which is the number that gets reported. The level has kept climbing._

Horrifically, working-age inactivity remained level at a little over 9mn, and long-term sickness was unchanged at 2¾mn. For the record, there are 34.5mn people in work in the UK. _(Neil in the margin: Roughly one working-age adult in five is outside the labour force altogether, and close to a third of those are there because they are ill. Neither figure has moved in a year.)_

The number of vacancies also fell again, to 702,000 in the [three months to August](https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/uklabourmarket/september2026), which is 86,000 below the pre-pandemic level and, outside the pandemic, the lowest since 2014. Since vacancies peaked at 1.3mn in the spring of 2022, they have fallen by around 600,000, unemployment has risen by around 500,000 and the unemployment rate has gone from 3.8% to 4.9%.

![Vacancies keep grinding lower](https://r4at4qm6kmohrtvq.public.blob.vercel-storage.com/charts/chart-labour-sep26-vacancies-66da3bfad9ca-light.png)

_Twenty-one thousand fewer vacancies than a year ago, and around 600,000 fewer than at the 2022 peak. Firms are not hiring._

### The wage numbers

Another standout was the wage numbers. In the private sector, regular pay growth was less than 3% in the three months to July, which the MPC should watch later this week. It was 4.6% a year earlier.

![Private sector pay growth is back below 3%](https://r4at4qm6kmohrtvq.public.blob.vercel-storage.com/charts/chart-labour-sep26-pay-9e7b503a96ea-light.png)

_The line that matters for the MPC is the lower one. At 2.9%, and with any reasonable productivity assumption, private sector pay is consistent with inflation at target._

Given one should assume 1% growth in productivity going forward ([I think it will be more than this](https://www.noisecancelling.co/read/fessing-up-uk-productivity)), wage growth of 3% is consistent with 2% inflation, which is the MPC's target, and for me is probably the biggest single reason why rates do not need to increase in the UK. _(Neil in the margin: Pay growth only feeds inflation to the extent that productivity does not absorb it. If output per hour rises 1% a year, a business can pay 3% more and its unit labour costs still rise only 2%, which is the Bank's target.)_

What shocked me, though, is that public sector wage growth accelerated in July to 7.2%, from 6.6% in the three months to July. [The ONS's own figure](https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/uklabourmarket/september2026) for public sector regular pay over the same three months is 6.3% against the private sector's 2.9%, and it notes that some NHS pay awards were paid earlier in 2026 than in 2025, which flatters the comparison. Take the lower number and the base effect, and the gap is still more than three percentage points.

_[Embedded media](https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/uklabourmarket/september2026)_

Unfortunately, this is yet another reminder that contrary to the vacuous nonsense doing the rounds in No 10 on Monday evening, the government cannot be trusted to be fiscally disciplined, far from it. And it is not something [the budget on 28 October](https://www.noisecancelling.co/read/deficits-gilts-and-the-cost-of-living) is going to tidy up.

## Inflation data

The much-anticipated [August inflation data](https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/august2026) was released on Wednesday morning. As expected, headline inflation (CPI) rose from 2.9% in July to 3.1% in August. Not surprisingly, the increase was caused almost entirely by the 7% increase in transport fuel prices (which are up 23% year on year), which boosted CPI inflation by 0.2%. _(Neil in the margin: The ONS has petrol up 9.1p a litre and diesel up 14.2p a litre between July and August alone, with motor fuels 23.0% higher than a year ago. Transport made the largest upward contribution to the annual rate.)_

![The headline is fuel. Everything underneath it is lower.](https://r4at4qm6kmohrtvq.public.blob.vercel-storage.com/charts/chart-cpi-sep26-under-headline-faebd44796d9-light.png)

_Every measure that strips out the fuel price sits below the headline, and every one of them is lower than it was a year ago. The 3.1% is the oil price arriving at the pump, not an economy generating inflation._

Goods price inflation rose in August from 2.2% to 2.7%, services inflation was unchanged at 3.4% (it was 4.7% this time last year) and, once again, food price inflation fell to a remarkably low 1.3%. Given what's happened to energy prices since August and the fact that food price inflation is likely to pick up from here, headline inflation is likely to rise in September to somewhere close to 3.3% and stay there or thereabouts for the remainder of this year.

What happens thereafter depends entirely on the unpredictability of the conflict in the Gulf and the wider Middle East and its underlying impact on the oil price, and indeed on European gas prices. This will also have an important bearing on [the energy price cap](https://www.ofgem.gov.uk/energy-price-cap), which is decided in November and implemented in January. If prices remain where they are now, I suspect Mr Burnham will do all he can, within the limited scope that is available to him, to constrain the impact on household bills. If he does nothing, his personal political capital will take a big hit given his stated focus on the cost of living, so if things remain as they are now, I expect some form of intervention. Based on this, the best economist in the country tells me to expect inflation to pick up in the early part of next year to about 3.5% but to then subside through the remainder of the year (assuming oil prices remain at about $100 and then fall to $80 through 2027), falling to the MPC's 2% target by year-end.

## The so-called second-round effects

Stepping back, this is clearly disappointing and defers again the monetary policy easing that the economy has been waiting so long for. But the idea that this scenario should lead to higher rates, as economic consensus believes, is, in my view, completely wrong.

Aside from the core underlying argument that higher energy prices act like an additional tax on consumers and businesses and so will constrain spending in the economy, there is once again in this data no evidence of the so-called second-round effects that central bankers talk about all the time. For example, core inflation in August, which excludes volatile food and energy prices, was unchanged at 2.6%. A year ago, it was at 3.6%. Even more significant, excluding energy, CPI inflation in August was 2.4%, compared with 3.9% a year ago. _(Neil in the margin: A second-round effect is what happens when a one-off price shock stops being one-off: workers win higher pay to cover the higher bills, firms pass those wages into prices, and the shock becomes embedded inflation. It is the reason a central bank might raise rates into an energy spike. It requires wages to be accelerating. Ours are decelerating.)_

![Where the second-round effects are supposed to be](https://r4at4qm6kmohrtvq.public.blob.vercel-storage.com/charts/chart-cpi-sep26-second-round-45a2ff91d0d6-light.png)

_This is the table the hawks have to explain. If an energy shock were feeding through into wages and prices, these four numbers would be rising. All four have fallen by more than a percentage point in a year._

Following Tuesday's labour market data that showed private sector wage settlements running below 3%, not only is it clear that there are no second-round effects, it's also clear that underlying inflationary pressures in the UK economy are unequivocally falling significantly and have been doing so consistently all year despite the “greatest energy price shock in history”. This is the same argument I made about [the inflation surge that never came](https://www.noisecancelling.co/read/inflation-myths), and this week both sets of data have supplied the evidence for it.

## The MPC meeting

One wonders what more evidence the hawks on the MPC require, but the sad reality is that three members of the committee will likely vote for a rate increase on Thursday, invoking their spiritual attachment to theory rather than reality. [In July they voted 6–3 to hold at 3.75%](https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2026/july-2026), with Megan Greene, Catherine Mann and Huw Pill each preferring 4%. Greene's stated reason was the emergence of second-round effects and Pill's was catch-up dynamics in wage and price setting. Both are looking for something this week's data says is not there.

_[Embedded media](https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2026/september-2026)_

Thankfully, I suspect that the six other less economically orthodox members of the committee will vote for no change.

## Postscript

When the war in the Persian Gulf kicked off at the end of February this year, aside from the apocryphal warnings about energy prices and the impact the greatest shock in history would have on the global economy, I remember that there were also dire warnings about the inevitable shortages of other key commodities including jet fuel, helium, fertiliser and urea. At the time, forecasts suggested the war would, as a result, lead to a global food crisis.

Whilst the media at the time was keen to highlight the catastrophe about to unfold for the global economy, it has been far less keen to report that no such food crisis has materialised. That's because countries outside the Gulf “rushed to fill the gap”, as the latest trade data shows. [Urea shipped via the Strait of Hormuz fell 83% in the year to April](https://news.un.org/en/story/2026/08/1168074), but unsurprisingly, total import volumes only fell 6%, because countries like Egypt and Nigeria increased their urea production by 98% and 81%, respectively, along with increased production in the US, Russia and China.

![The disruption was real. The food crisis was not.](https://r4at4qm6kmohrtvq.public.blob.vercel-storage.com/charts/chart-cpi-sep26-urea-a18a86e60276-light.png)

_The disruption was not imagined: a third of globally traded urea goes through that waterway, and those flows stopped. The famine that was forecast to follow did not._

This may seem trivial, but it is yet another reminder, if we needed one, that the media's reflex to events is all too often to exaggerate their significance, especially when those events are initially troubling. I don't see any chance that the media's behaviour will change, but even more worrying is that so many politicians and regulators base their opinions and decisions on what they consume from the media rather than on facts and data. 

One might hope they eventually learn that when the media is utterly convinced of something, it is time to believe the opposite.