Inflation slid in July, thanks to lower energy bills and easing food inflation, but core inflation is wearing short shorts on a hot slide, so the descent is far stickier and more painful than anyone hoped.
Core inflation (excluding energy, food, alcohol and tobacco) remained unchanged from June, at 6.9%. This was widely predicted, but will still come as a disappointment for the Bank of England, which has a beady eye on this measure when setting interest rates.
Gas and electricity prices had a major part to play in the fall in inflation, with the lower energy price cap kicking in and cutting bills for millions of people on standard tariffs. It wasn’t a massive cut, and prices are still way ahead of where they were before inflation took off, but it’s a ray of light after what has been a particularly dark time for billpayers.
Relief at the supermarket tills also continued to spread. In the vast majority of cases, it’s not that things are getting any cheaper, it’s just that prices are rising more slowly. However, grocery inflation has dropped back very slightly to from 17.3% to 14.8%, as lower wholesale prices finally feed through to more shelves. We can’t guarantee the easing continues.
There are still horrible geopolitical issues, and the export of wheat from Russia and Ukraine depends on delicate international agreements. There’s also the threat from weather phenomena, which could cause more spikes – the price of olive oil is still up 41.5% on the back of crop failure.
Anyone counting the cost of a shockingly expensive holiday this year will be unsurprised to learn that the rising price of flights and hotels were one of the factors pushing inflation up. In the aftermath of the pandemic, we’re not prepared to forego our annual holiday. Pressure on flights means we’re paying handsomely for scarce seats. Meanwhile, closer to home, the staff-intensive hospitality industry is charging more to cover ever-higher wage bills – and we’re paying the price. The real worry is how much of this added cost is affordable, and how much has been slapped onto credit cards by people who can’t afford the stretch, but just can’t face another summer at home in the rain.
What this means for mortgages and savings
We’re not stepping off the rate rise cycle just yet. The fall in overall inflation is good news, but it needs to be seen in the context of stubborn core inflation, record wage inflation and surprisingly high growth figures. All of these things mean the Bank of England is likely to keep pedalling this particular cycle at the next Monetary Policy Meeting.
However, today’s lower inflation will influence their thinking, and it’s likely to mean we are getting closer to the end of the rate rise cycle. The growing consensus of a lower peak in interest rates has already influenced the savings and mortgage markets.
For anyone with a variable mortgage, it’ll be a while before there’s any really good news. We’re still expecting at least one more rate rise, so your mortgage is still going to get more expensive, and even when rates stop rising, they’re likely to hold steady for months, so there won’t be any easing of your rate in the near future.
However, for those coming to the end of a fixed rate deal and looking to remortgage, lower rate expectations have already been feeding through into lower fixed rate mortgages – which pushed the average two-year fixed rate back down to 6.79%, according to Moneyfacts – down from the recent peak of 6.85% at the start of August, and only fractionally higher than this time last month.
For savers, an easing of rate expectations could well mean the 1-year fixed rate market has already peaked, and has meant longer-term fixed rates have stabilised. If you’ve been waiting for rates to rise to a level where you’re prepared to fix, it’s time to take stock. The easy-access market, meanwhile, is likely to keep creeping up while rates are rising, especially while the regulator is keeping the pressure on, and NS&I keeps pushing premium bond prize rates ever-higher.
Sarah Coles is head of personal finance at Hargreaves Lansdown
