Inflation stayed at 2 per cent in the 12 months leading up to June.
The figure was also 2 per cent in the year running up to May, according to figures released on Wednesday by the Office for National Statistics (ONS), and is consistent with economists’ expectations.
Core inflation, which excludes volatile measures such as food and energy prices, stayed at 3.5 per cent, the same as in May. Services inflation also remained at 5.7 per cent.
However, grocery inflation is now at its lowest level in almost three years, at 1.5 per cent.
These are the first inflation figures to be released under the new Government. Darren Jones, Chief Secretary to the Treasury, said: “It is welcome that inflation is at target, but we know that for families across Britain prices remain high. We face the legacy of fourteen years of chaos and economic irresponsibility. That is why this Government is taking the tough decisions now to fix the foundations so we can make every part of Britain better off.”
The rate of price increases is now steady at the Bank of England‘s target level of 2 per cent, though it’s expected to go up again later in the year, despite inflation falling consistently in 2024, following a peak of 11.1 per cent in 2022.
It comes two weeks before the Bank makes a decision on whether the base rate will stay the same, at 5.25 per cent, or finally be cut, at the start of August.
What will happen to inflation in 2024?
Inflation is expected to rise again later this year despite the recent falls.
The Bank’s Monetary Policy Committee (MPC) warned in a recent report that it would increase slightly to around 2.5 per cent in the second half of 2024.
The major reason for this is that inflation is measured based on the growth in prices over the past year – so a large part of the figure is based on what prices were 12 months ago.
This April, the energy price cap – the maximum most households pay for each unit of gas or electricity used – was cut by the regulator, Ofgem.
By comparison, in April 2023, the amount people were paying for their energy was at the highest level on record.
Energy prices started to fall in the second half of last year, and experts are not currently expecting more dramatic cuts – in fact they’re set to increase from October.
This means that once we reach the second half of 2024, the annual price fall in energy will not be as sharp as it is in current figures, which means it will not have as big a downwards drag on the overall inflation figure as it is currently having.
What does this mean for interest rates?
The Bank of England tends to cut interest rates as inflation comes down. At its next meeting, some experts predict that the MPC will cut rates from 5.25 per cent, however this latest reading – particularly the high services inflation figure – suggests the next cut could be pushed further back in the year.
Paul Dales, chief UK economist at Capital Economics, said: “At the moment, we’re becoming even less confident in our existing forecast that the Bank will cut interest rates to 5 per cent at the next policy meeting in August.”
Monica George Michail, associate economist at the National Institute of Economic and Social Research (NIESR), said the figures would prompt the Bank “to remain cautious with regards to interest rate cuts”.
What does this mean for mortgages, savings and pensions?
Mortgages
Mortgages are not directly affected by inflation, although many products are affected by the Bank of England base rate, which inflation influences.
Tracker products and standard variable mortgages change directly when interest rates change.
Fixed mortgages tend to work on long-term predictions for where the base rate will go. This means that a big drop in inflation can send mortgage rates down, because it can lead experts to believe the base rate will fall sooner rather than later.
Today’s inflation figure to unlikely to be far enough away from what was predicted to change rates massively. Fixed rates are currently falling, with mortgage lenders having cut them to entice business.
Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, said: “A rate reduction as early as next month would deliver instant relief for new borrowers and those on trackers, but it won’t lessen the blow for those locked into fixed rate deals with some time left to run.
“Those on long-term fixes taken out before or during the early stages of the Bank’s rate-hiking cycle are likely to still face a jump in their repayments when they eventually come to refinance unless they have managed to clear a large chunk of their outstanding balance. A rate cut, however, may ensure the hit from a higher mortgage rate may not be heavy as once feared.”
Savings
High inflation is bad news for savers as it erodes the value of money held in the bank. Therefore, the lower the rate, the better the news for savers.
However, experts believe we are “past the peak” for savings, with most fixed rates now dropping below 5 per cent. This means it is worth taking advantage of the best deals now.
Currently, the best easy-access account is 5.2 per cent with Ulster Bank – above inflation.
Adam Thrower, head of savings at Shawbrook Bank said: “This situation, if it continues, could lead to interest rate cuts in the future, potentially impacting returns on savings accounts. With discussions of rate cuts in August, some savers might find fixed-rate accounts with longer terms more attractive now than they might be later.”
Pensions
Low inflation is welcomed by pensioners who have been struggling with the cost of living crisis over the past two years.
Another factor to be aware of is the impact of inflation on annuity rates. Annuities offer a guaranteed annual income in retirement. They offer an alternative to drawing down money from a pension pot, which could eventually run out, particularly if a retiree lives longer than expected.
While they have been unpopular in recent years, rising interest rates have improved the annual incomes someone can buy.
But for retirees opting for one, time may be of the essence. As inflation goes down, the Bank of England is likely to cut interest rates later this year, so today’s good rates may not last indefinitely.