Britain’s unemployment rate rose unexpectedly to the most in six months as the number of jobs in the economy shrank, an indication of cooling in the once red-hot labor market.

The jobless rate rose to 4.2% in the three months through February after a reading of 3.9% in the previous period, the Office for National Statistics said Tuesday. It was the biggest jump since 2020, when the country was emerging from pandemic lockdowns.

The figures provided a tentative sign that inflationary pressures in the jobs market are cooling. But the the report also showed wage growth, which the Bank of England is watching carefully, remained stubbornly high, easing to 6%. That was only slightly down from the 6.1% reading previously and above the expectations of economists.

“Easing pressure in the labor market keeps the Bank on track for a summer rate cut,” said Yael Selfin, chief economist at KPMG UK. “The rise in the unemployment rate paints a picture of a less tight labor market. The exact timing of the first rate cut will be a hot debate.”

The policymakers have been reluctant to signal a shift away from their fight against inflation because of concerns that continued strong pay growth will fuel price rises.

The pound slipped back 0.2% against the dollar to $1.2422 following the release. Traders’ bets on BOE interest-rate cuts were little changed, with the market implying two quarter-point reductions by the end of the year. The first cut is fully priced by September, with an 80% chance of an earlier cut in August.

Reading on the labor market have been clouded with problems in deriving the official data. The ONS for months has urged caution in interpreting its figures on employment, unemployment and inactivity due to a plunge in the number of responses it receives to its surveys.

Nevertheless, Tuesday’s report showed a deterioration in the labor market on a number of fronts:

• The unemployment rate was pushed up by the UK economy losing 156,000 jobs compared to the previous three-month period, the biggest drop since last August. Economists had expected a gain.
• Real-time administrative data show the number of employees on payroll fell by 66,661 in March, the biggest drop since November 2020.
• The redundancy rate — showing firms shedding workers — rose in three months through February to 3.9 people per thousand employees. That’s up from 3.1 a year ago.
• Inactivity — those neither working nor looking for a job — rose in the latest quarter, driven by those aged 16 to 34 years. These increases were partially offset by more people aged 35 to 49 years returning to the labor market.

However, there were some lingering signs of tightness. A long-running slide in job vacancies ended, with job postings rising to 916,000. Regular private sector wage growth, a key metric of domestic inflationary pressures for the BOE, edged down only slowly to 6%.

Businesses are beginning to shed workers after a protracted period of weak economic activity culminating in a shallow recession in the second half of last year. While the economy is expected to emerge from the recession in 2024, growth is expected to be lackluster again.

“Recent trends of falling vacancy numbers and slowing earnings growth have continued this month albeit at a reduced pace,” said ONS director of economic statistics Liz McKeown. “At the same time, we are now seeing tentative signs that the jobs market is beginning to cool, with both a fall in the headline employment rate from our survey and a drop in the total number of people on payrolls from HMRC data.”

Stronger wage growth along with falling inflation have been a boost for consumers, who are struggling to shake off a cost-of-living crisis that drained personal finances over the past few years. Real regular pay growth based on the headline Consumer Prices Index rose to 2.1%, the highest rate since September 2021.

Financial markets have scaled back bets on lower borrowing costs coming from the next two BOE meetings. Unexpectedly strong US inflation data and warnings from BOE hawks about similar risks remaining in the UK prompted the shift.