1Q26_ Quarterly Outlook Report_Final_EN - Flipbook - Page 75
T H E P LUMB LI N E | A RETU RN TO F I RS T PRI N CI PL ES
Higher payroll costs push firms toward leaner workforces
80
6%
5%
40
4%
0
3%
-40
2%
-80
1%
0%
Apr 2022
-120
Nov 2022
Jun 2023
Jan 2024
Job vacancies (3-mth chg, 000S) - RHS
Aug 2024
Mar 2025
Oct 2025
3-mth rolling unemployment rate - LHS
Source: Bloomberg Finance LP, Scotia Wealth Management
As slack gradually builds, wage growth is beginning to ease. Pay increases remain elevated by
historical standards, but the direction of travel is downward as firms regain bargaining power and
workers face fewer outside options. This process should help to moderate domestically
generated inflation pressures over the coming year, reinforcing the expectation that underlying
inflation will continue to trend lower.
Inflation dynamics remain challenging in the near term. Headline CPI stayed in the mid 3% range
through much of 2025, driven largely by services inflation. However, the medium-term outlook is
more constructive. As labour market slack increases, wage growth slows, and several temporary
price pressures fade, underlying inflation is expected to ease. Our forecasts see CPI averaging
around 3.4% in 2025, falling to approximately 2.5% in 2026, before approaching toward the 2%
target by 2027.
Inflation set to ease with softer labour market and fading price pressures
12
10
8
6
4
2
0
2019
2020
2021
CPI YoY%
2022
Core CPI YoY%
2023
2024
BoE inflation target
Source: Bloomberg Finance LP, Scotia Wealth Management
Fiscal policy remains a central risk to the outlook, and the latest Budget reinforces the trade-offs
facing the economy. Chancellor Reeves’ package signaled a clear pivot toward fiscal discipline,
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