What rising inflation means for you: CPI rises for first time this year - what happens next?
Inflation rose above the Bank of England’s 2 per cent target in July, after reaching its lowest point in three years the previous month.
At its peak, inflation stood at 11.1 per cent. The latest ONS figures show that the CPI index increased from 2 per cent in June to 2.2 per cent in July.
The headline figure has been falling for the last few months, and it marks the first time the rate has increased since a surprise uptick in December 2023.
While the headline rate has risen, there has been a slight easing in core inflation, from 3.5 per cent to 3.3 per cent - which is a positive sign.
The easing of stubborn core inflation paired with easing wage rises suggest that we are on track for further rate cuts, just two weeks after the Bank of England cut rates to 5 per cent.
Analysts had largely expected inflation to rise as the effects of lower food and energy prices started to drop out of the numbers, but much lower than feared.
What does the inflation fall mean for you, where does this leave the Bank of England on interest rate hikes, and could inflation tick higher again? We look at all this and more.
The cost of living remains stubbornly high - the price of food is 5% higher than a year ago
What's the latest on inflation?
Consumer price inflation ticked higher between June and July, up from 2 per cent to 2.2 per cent, as the effects of lower energy prices dropped out of the numbers.
The slight rise in the headline number was largely expected and analysts were closely watching core inflation, which has continued to run hot.
Core inflation - which excludes volatile items like food, energy & alcohol - now stands at 3.3 per cent in the 12 months to July 2024, down from 3.5 per cent in June.
The largest downward contribution came from restaurants, hotels and transport, with prices falling this year but rising a year ago. This was offset by rising prices in housing and household services, which include energy.
Energy prices are lower than a year ago but are still much higher than in March 2021
Monthly housing aand household services prices rose by 0.1 per cent in July 2024, having fallen by 1.4 per cent last year. The annual rate rose to 3.7 per cent in the year to July 2024, up from 2.3 per cent in the year, largely driven by gas prices.
Although energy prices are now lower than they were a year ago, gas and electricity prices in July 2024 are now around 68 and 45 per cent higher, respectively, than in March 2021.
Food inflation stands at 1.5 per cent, at the same level as the previous month, which is good news for consumers who have faced much higher prices for three years.
The main downward effect came from a combination of bread and cereals, fish, vegetables, and mineral waters and soft drinks.
Services inflation fell from 5.7 to 5.2 per cent, well above the 5.6 per cent rate forecast by the Bank of England. This was largely driven by a fall in restaurants and hotels prices, and will reassure the central bank that some of the stickiness in services inflation had been due to one-off events.
What does inflation falling mean for you?
Consumer prices inflation, known as CPI, measures the average change in the cost of consumer goods and services purchased in Britain, with the ONS monitoring a basket of goods representative of UK consumers.
Monthly change figures are given but the key measure that is watched is the annual rate of inflation. The Bank of England has a target to keep this at 2 per cent.
An inflation spike has hit over the last two years or so, with the CPI rate peaking in October 2022 at 11.1 per cent.
Falling inflation means the rate of increase in the cost of living is easing but it doesn't mean life is getting cheaper: prices are still up on average by 3.2 per cent compared to a year ago.
A decline in the inflation rate is to be celebrated though, as it increases the chance of wages, investment returns and savings interest matching or beating inflation - delivering a real increase in people's wealth.
> The best inflation-fighting savings deals
The main measure by which the Bank of England seeks to control inflation is interest rate rises. Lower inflation decreases the chance of more base rate rises and lowers expectations of how high rates will go.
Expectations that the Bank would have to keep raising rates to combat inflation have sent mortgage rates spiralling costing mortgaged homeowners dear.
> How much would a mortgage cost you? Check the best rates
Could inflation rise again?
While the headline inflation figure rose 0.2 percentage points, it doesn’t tell the whole story and the latest figures are largely positive.
Bank of England Governor Andrew Bailey and his colleagues will feel vindicated in their decision to cut rates two weeks ago.
However, it doesn’t mean the Bank is in the clear. Inflation could continue to rise for several reasons, not least geopolitical tensions having an impact on supply chains and energy prices, as well as any decisions made by the new Government.
Pantheon Macroeconomics thinks rate-setters need to look through the downside surprise in services inflation, ‘because volatile hotel prices drove both misses.’
‘Hotel prices surprisingly fell 6.4 per cent month-to-month in July. That was, we think, partly down to the date on which the ONS collected the data. They checked hotel prices for July 9, which our monitoring suggested would result in a sharp fall in accommodation, whereas collecting CPI on July 16 would likely have led measured hotel prices to rise strongly again.’
Economists at Pantheon Macro also think airfares could rebound, which will likely reserve partially in August’s inflation reading.
‘We expect inflation to rise to 2.4 per cent in August as a weak services inflation rise in 2023 drops out of the annual inflation comparison while airfares surge to reflect school holiday prices and hotel prices likely rebound a little.
‘Looking further ahead, food and non-energy goods inflation have no further to fall now they have converged to producer output price inflation while Ofgem will likely hike the utility price cap by around 10% in October after wholesale energy costs have risen.
‘Getting inflation sustainably back to the 2 per cent target will require services inflation to drop closer to 3.5 per cent, but that will take time because wage growth remains strong. We look for CPI services inflation to fall only to 5.1 per cent at the end of 2024.’
The stickiness of services inflation will continue to plague the more dovish members of the MPC. Capital Economics notes that while overall inflation in the UK is below that in the US (3 per cent in June) and the Eurozone (2.6 per cent in July), services inflation is still higher.
Will the Bank of England cut rates again?
The Bank of England keeps a close eye on inflation and wages data. The rise in the headline rate was largely expected and while the Bank voted to cut rates, ratesetters have suggested goods and services prices are set to jump again in the coming months.
That said, a fall in services inflation will be particularly welcome after two consecutive months of higher-than-expected readings of 5.7 per cent.
This could leave the door open to more rate cuts this year, but just how likely is that for September’s reading?
The Bank of England could come under pressure to cut rates again in its next meeting
While the fall in core and services inflation is encouraging, some economists think inflation will rise again which could delay further rate cuts.
Pantheon Macroeconomics says: ‘Much of today’s downside surprise was driven by erratic airfares and hotel prices, which the MPC has argued should be ignored.
‘Looking at the big picture, services inflation is slowing but remains strong. Accordingly we do not think there is enough here to push the MPC into cutting rates again in September.
‘We expect rate setters to wait until November for the next Bank Rate cut. We look for three more cuts next year.’
Ruth Gregory, deputy chief UK economist at Capital Economics thinks there is a 45 per cent chance of a rate cut in the Bank’s September meeting.
‘This does lend some support to our view that CPI inflation will be back below the 2 per cent target from March next year and that interest rates will fall further and faster than markets expect.
‘Accordingly, we are sticking to our view that the Bank will pause in September, and that fading services inflation will mean rates fall to 4.5 per cent this year and 3 per cent next year.’
Richard Carter, head of fixed interest research at Quilter Cheviot says that services inflation remains too high and wage growth is still above the headline inflation rate, which could present risks if the BoE moves too quick in cutting rates.
‘As such, we would expect November to be the earliest date for the next rate cut, unless we see a significant deterioration of the economy in the meantime.’
What does it mean for your savings?
Savers might breathe a sigh of relief as inflation finally reaches its target, but it still means cash savings are being eroded in real times.
Alice Haine, personal finance analyst at Bestinvest said: ‘A rate reduction could see some of the top deals disappear fast and with inflation remaining low at 2 per cent and interest rates still at a 16-year high at 5.25%, those with cash to spare can take advantage of this savings sweet spot to secure a healthy return.
The top easy-access deals, notice and fixed-rate bonds are still sitting above the 5 per cent mark and with savings product choice currently at the highest level in 12 years, savers need to do their homework to find the best deal to suit their needs.
'Rates are likely to ease back in the months ahead so securing a top deal now will prolong the amount of time a saver receives an inflation-beating return.'
Caitlyn Eastell, Spokesperson at Moneyfactscompare.co.uk, said: 'It is crucial savers keep on top of the changing market and make the switch to ensure they are not getting a raw deal, especially as we have seen some of the top rate deals drop below 5 per cent.
'It would not be too surprising to see more providers adjusting their rates in reaction.
'Since the previous inflation announcement, fixed rates have faced further reductions, so it may be wise for savers to begin considering locking into an interest rate while the majority continue to pay competitive returns.
'Longer-term rates have suffered the most, seeing drops as large as 0.31 per cent for a five-year term month-on-month.
'Although, typically, base rate cuts usually impact variable rates, we have been seeing an increasing number of providers lowering rates on accounts offering fixed returns.'
> Check the best savings rates in This Is Money's independent tables
What does it mean for your mortgage?
Mortgage rates have declined substantially from the peak seen during the inflation-panic led spike over summer.
Expectations that rates have peaked are pushing down gilt yields and lenders' cost of borrowing and denting savings rates, this could feed through to a continued decline in mortgage rates.
Haine says: ‘Homeowners and first-time buyers hoping for a second rate cut sooner rather than later may be disheartened by the latest inflation reading, as it reduces the likelihood of a September reduction.
‘Comfortingly, while mortgage rates remain high some major lenders have already rolled out cuts with the number of sub 4 per cent home loans on the rise - offering glimmers of better times ahead.
‘This may deliver the reassurance nervous buyers need to push ahead with a move whether to purchase a first home or upsize to a larger property.’
> Compare the best mortgage rates based on your home's value and loan size
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