• Headline inflation in the United Kingdom has dropped to 3%, whilst unemployment has climbed to 5.2% and youth unemployment now exceeds 16%¹.
• The deterioration in jobs reflects the delayed impact of earlier interest rate rises feeding through to households and businesses, compounded by higher minimum wages that have raised hiring costs, particularly freezing many younger workers out of employment.
• Markets are buoyant because this opens the door to rate cuts. Investors see rising unemployment as confirmation that monetary tightening has worked and are now pricing in imminent easing from the Bank of England.

Bad news for jobs

Inflation in the United Kingdom is finally cooling at pace, with headline inflation falling this week to 3% from 3.4% the previous month². This welcome progress on prices is being accompanied by a very weak labour market. The core unemployment rate has now risen to 5.2%, and nine million people aged 16 to 64 are classed as economically inactive, equivalent to 20.8% of the working-age population³.

The deterioration is most acute amongst younger workers. Unemployment for 16- to 24-year-olds has climbed to 16.1%, the highest level in over a decade, with just shy of three quarters of a million young people currently out of work⁴. High minimum wages, whilst supportive of incomes for those in work, have increased hiring costs and added further pressure to the bottom line.

Crucially, much of this weakness reflects the delayed impact of earlier interest rate rises. Higher interest rates do not slow an economy instantly. Instead, they work gradually through tighter credit conditions. Over time, households spend less, companies scale back investment, and demand across the economy softens.

In short, falling inflation and rising unemployment are two sides of the same coin. They signal that monetary tightening is finally biting – slowing the economy, which grew just 0.1% at the last print⁵.

Good news for markets

Given the dour employment picture, you might expect markets to be falling. Instead, the opposite has happened. The UK’s main stock market has risen by more than 2% this week⁶ (as of 18 February), whilst the yield on the UK 10 year government bond has dropped from 4.50% to 4.36%⁷.

We find ourselves in a slightly perverse situation, where the worse economic sentiment is, the more positive the outlook for investors. Rising unemployment is a clear sign that growth is slowing, and evidence that tighter monetary policy has finally had its intended effect.

This means investors are confident that more interest rate cuts are close. Markets are now pricing in, with near certainty, a 0.25% reduction at the next meeting of the Bank of England’s Monetary Policy Committee⁸, taking the policy rate down from its current 3.75%, with further cuts expected later in the year.

For households, cheaper borrowing improves affordability and supports spending, helping stabilise the labour market over time. For businesses, a lower cost of capital makes investment projects more viable, encouraging expansion, productivity upgrades, and ultimately job creation. Governments also benefit, as reduced borrowing costs make it easier and cheaper to finance public spending.

Bowmore portfolios

Within our portfolios, we continue to hold a sizeable allocation to UK equities, reflecting our long-held view that the UK market offers access to high-quality global businesses trading at meaningful discounts to international peers. This positioning has been a major contributor to our strong performance over the past year and into 2026. We retain exposure across both large and smaller companies, recognising that whilst large caps have delivered strong share price gains alongside attractive dividend income, smaller companies offer greater sensitivity to improving domestic conditions.

In that context, we have made a measured adjustment within our core portfolios, introducing Gresham House UK Smaller Companies in place of Chelverton UK Equity Growth. Smaller businesses are typically more exposed to borrowing costs and domestic demand, and we believe they stand to benefit disproportionately as interest rates continue to fall.

On the fixed income side, we have remained cautious on interest rate risk, a stance that has supported returns during a multi-year period of pronounced volatility in government bond yields. With inflation now cooling apace and additional rate cuts firmly in focus, we are considering extending our sensitivity to interest rate risk at the margins so as to take advantage of the evolving outlook.

Source: AlphaTerminal, data as at 18/02/2026

The value of your investments can go down as well as up, so you could get back less than you invested. Past performance is not a guide to future performance.

Sources:
1.BBC News
2.Bloomberg UK
3. UK Parliament
4. BBC News
5. Office for National Statistics
6. Trading Economics
7. Trading Economics
8. London Stock Exchange Group