The UK labour market was hit by two big shocks towards the end of 2021: the end of the government’s furlough scheme and the arrival of the Omicron variant.

The good news from the latest official data is both were negotiated without the feared lengthening of the dole queues. Employment is up, job vacancies are at a new record high and the unemployment rate is down.

The bad news is that the challenge posed by rising inflation looks like it will prove to be a tricker hurdle to surmount than the end of the furlough or the restrictions that were imposed by the four nations of the UK in response to Omicron.

When the Bank of England held off from raising interest rates last November it did so because it wanted to judge the impact of ending wage subsidies. The evidence is now in: there is nothing in the latest figures to stay the hand of Threadneedle Street’s monetary policy committee. Borrowing costs have been raised at the MPC’s last two meetings and will go up again.

The tightness of the labour market means average earnings are rising at an annual rate of more than 4%. That’s because the demand for workers as businesses recover exceeds supply. The number of people in employment is more than 500,000 below its pre-pandemic level, largely because of a fall in self-employment. Older workers have left the workforce, many of them on health grounds. This combination of factors means employees are in a stronger bargaining position than they might have expected a year ago, when the economy was locked down and the furlough still in place.

But earnings would need to rise by even more to keep pace with rising prices. Inflation hit a 30-year high of 5.4% in December and will rise still further over the coming months, which means the squeeze on real incomes will intensify.

In the circumstances, workers will seek to protect their living standards by asking for higher pay. That pressure will be sufficient to make the Bank of England nervous about a wage-price spiral, but not strong enough to compensate employees when the cost of living exceeds 7% in the spring.

Going is tough in post-furlough Britain

Government support meant corporate insolvency was a dog that didn’t bark earlier in the pandemic. Help came in a number of forms: firms had their wage bills covered, there were grants and business rates holidays; and companies in trouble were given breathing space from their creditors.

Businesses are now being asked to manage on their own, and unsurprisingly a large number of them are finding the going extremely tough. The latest figures for England and Wales in January show the number of company insolvencies more than doubled from the same month in 2021, as did the number of compulsory liquidations.

That’s not quite as alarming as it looks given the artificially low levels of business distress during the pandemic. Business failures last month were only slightly up on the pre-pandemic month of January 2020, a better comparison.

Even so, the trend is now clearly upwards. Creditors are taking a tougher line now that they can. And, having just about kept going through two years of Covid-19, the owners of some small businesses are giving up because they can’t see things improving with a year of rocketing energy bills, rising inflation and higher interest rates ahead.

To some extent, this is perfectly normal. Businesses cease trading all the time, and the failure rate is bound to be higher now given the acceleration of structural changes – the increase in online shopping, for example – seen in the past two years.

So while insolvencies are still a dog that hasn’t really barked, they are starting to emit a low growl. They need to be watched.

US inflation figures a worry for UK

Another day, another set of worrying inflation news from the other side of the Atlantic. US producer prices – a gauge of what businesses charge for their goods and services – rose by 1% last month, double what Wall Street was expecting. There are two points to note here: producer prices are a good early guide to future consumer prices and, as a rule of thumb, what happens in the US happens in the UK with a lag of a few months.