Core blimey! Falling inflation is set to ease price rise pain and mortgage misery. Inflation surprised forecasters, falling away faster than expected, and even super-sticky core inflation has dropped back. It’s great news for shoppers and homeowners, but may well have a sting in the tail for savers.
We’re already feeling the easing at the tills. We’re still having to dig deeper every time we venture near a supermarket, but we don’t have to brace ourselves quite so hard for bad news when the total is ringing up.
Grocery inflation has dropped back very slightly from 18.3% to 17.3%, as lower wholesale prices and lower energy costs finally start feeding through to the shelves. We can’t guarantee the easing continues. There are still horrible geopolitical issues and weather phenomena, which could cause more spikes – the price of olive oil is still up 44.8% on the back of spectacular crop failure.
There was also more relief at the petrol pumps, as prices continued to fall. The massive step back in fuel inflation owes more to rises a year earlier than major movements in June. However, the price of petrol was an impressive 22.3% lower than a year earlier and diesel was down 24.3%, which will be great news for anyone hitting the road this summer.
Given this is coming on the back of worrying high wage inflation figures, the Bank of England isn’t going to step away from the interest rate rise lever just yet, so another hike may well be on the cards for August.
However, falling inflation may mean the Bank isn’t tempted to lean so hard on this lever in the coming months, and this in itself is enough to move markets. Savers and mortgage borrowers won’t have to wait for the next rate decision for this to have an impact, because a change in expectations themselves would be significant.
For anyone with a variable mortgage, little will change in the immediate future. We’re still expecting more rate rises, so your mortgage is still going to get more expensive. If you moved onto a variable deal when your fixed rate expired in the hope that fixed rate deals would get cheaper, you’ll be paying for that decision.
However, for those coming to the end of a fixed rate deal and looking to remortgage, a fall in rate expectations could make a massive difference. The market has been pricing in an awful lot of rate rises, which is what has pushed the average 2-year fixed rate to a horrible 6.78%, according to Moneyfacts.
However, if inflation continues to drop, it may not need quite so many rises. If the market is convinced of this, we may well see fixed mortgage rates ease slightly – well before the MPC meets again.
For savers, an easing of rate expectations would mean fixed rate savings stop inching upwards. We’ve already seen some of the best rates go in a flash, and on the back of this news, we may well see more of the best deals pulled from the market.
If you’ve been waiting for rates to rise to a level where you’re prepared to fix, it’s time to take stock. With the most competitive one-year fixed rate at 6.15% and the best over two years at 6.2%, at least for now, this may be as good as it gets. Given that inflation has now dropped to 7.9%, and is likely to be lower by the time we get a year down the track, it’s worth considering making a move sooner rather than later.
Sarah Coles is head of personal finance at Hargreaves Lansdown
