Inflation falls to 6.8% – a turning point in the cost-of-living crisis?

Inflation in the UK dropped to 6.8% in the year to July from 7.9% in June, the second consecutive sharp monthly drop.

 
Now at a 15-month low, the fall was driven by a reduction in the energy price cap and food costs rising less rapidly – particularly milk, bread and cereals

However, UK inflation remains stubbornly high compared to many other nations, and well above the Bank of England’s target rate of 2% and as a result it is expected to raise interest rates again next month in an effort to bring inflation down.
 
Here are some reactions from experts around the markets:
 
Ben Thompson, Deputy CEO at Mortgage Advice Bureau, says: “While July’s inflation fall is a firm sign that the headline rate is moving in the right direction, salary rises have thrown up yet another conundrum for the Bank of England.

“Wages have grown at a record level to 7.8% and are now higher than current inflation at 6.8%. Inflation dropping back opens the door for the BoE to press pause on rate rises, but record wage growth keeps potential hikes firmly on the table.

“Inflation being below average wage growth could mark a turning point in the cost-of-living crisis, and potentially signal good news for mortgage customers, with lenders already reducing their rates and more manageable payments becoming a reality. 

“As always, the best advice for homebuyers is to act early, as this will allow them to lock in the most suitable mortgage, backed up with the security that if a better deal comes along, they can take it.”
 
Rob MorganThe Bank of England just about on course to slay the inflation dragon
 
There is more evidence today that UK inflation is starting to buckle under the weight of the 14 interest rate hikes so far. CPI inflation fell broadly in line with consensus expectations to 6.8% for July, which builds on June’s favourable lower-than-expected reading, with subsiding energy and food price rises translating to significant falls in the headline numbers.

Yet there are also some concerns. Core CPI (which excluded energy, food, alcohol and tobacco) rose by 6.9% in the 12 months, unchanged from June. Meanwhile, the CPI services rate rose slightly from 7.2% to 7.4%. Combined with strength in recent wage data this will cause the Bank of England some anxiety that other areas are picking up the baton, resulting in a stickier brand of inflation that is difficult to tame.

What does it mean for interest rates?

Ahead of today’s numbers the BoE’s monetary policy committee would have worried that rising wages and resilient economic data were outweighing it’s tight monetary policy. It now has a little more evidence that rising prices are being tamed thanks to its actions so far.

The Bank still has a difficult choice, though: Purge the poison of inflation early with further increases in rates, or hold off a while and observe the effect of its tightening policy so far. Overall, the inflationary pressure of rising wage growth and a resilient economic picture means the BoE is likely to keep going for now. There is more data to come but as things stand a further quarter point rise to 5.5% at its next meeting on 21st September looks likely.

Getting the inflation genie back into the bottle has been a struggle for the Bank of England. However, one or two more quarter point rises to 5.5% or 5.75% later this year will likely mark the peak for this cycle. Don’t expect any cuts to interest rates any time soon, though. Tight monetary policy is unlikely to be reversed in 2023 and the major central banks, including the UK, will hold higher rates for longer in order to fully quash inflation. The BoE also has a little more work to do than others given the higher headline rates that still prevail and the tight jobs market.

What is the impact on households?

Although inflation will now subside towards the target level of 2%, it is likely households will have to endure relatively high interest rates for some time to come. The BoE may need to keep rates elevated well into 2024 to keep inflationary pressures at bay, which will keep access to cheap borrowing closed off.

Despite rising wages, escalating mortgage rates and the high costs of essentials continue to put household finances under strain. Although the adverse environment is set to continue before it gets significantly better, households can at least now look forward to a gradual decline in available mortgage interest rates.

For savers, the increase in interest rates has been a welcome tonic compared with the dreary returns of much of the past decade. However, even the most competitive accounts pay less than headline inflation meaning that the spending power of cash is still stuck in reverse gear for now.

What does it mean for investors?

UK government bond markets were knocked back by last week’s more robust GDP numbers and this week’s wage data. This CPI reading doesn’t really change the view that the Bank of England still has more work to do, which should support bond yields and suppress prices. Similarly, in currency markets the pound has been robust this year in the expectation UK interest rates will peak and remain higher than in other countries in order to combat more persistent inflation, and today’s CPI doesn’t significantly change that picture.
 
Lily Megson, Policy Director at My Pension Expert said: “Inflation falling and wages rising will bring relief to Britons. But it might only be temporary. Indeed, inflation’s persistent grip on people’s finances is not set to loosen any time soon. Hardly a settling prospect for those in, or approaching, retirement.
 
“Whilst retirees can enjoy some reassurance that their state pension will increase in line with inflation, thanks to the triple lock, the Government cannot assume that this will fix the UK’s pension issues. More can and must be done to provide those approaching or in retirement with the necessary support to help them understand exactly how they can protect their pension from wider economic circumstances. Improving access to information via prioritising the pension dashboard, or improving access to advice, would be a strong starting point. 
 
“The approach of just “waiting until inflation comes under control” is not fit for purpose. The Government must look to other areas of support to help people better understand their financial circumstances. Arguably, the better people feel more supported in their financial situation, the more in control they will feel of their situation – a feeling many people will value during this economically volatile period.”
 
Mohsin Rashid, CEO of ZIPZERO, said: “While this inflationary burden may have slightly eased, its weight continues to cripple millions of Briton’s finances.

“Everyday essentials likes clothing and groceries continue to get more and more expensive. And while savvy cost-cutting hacks like bargain hunting and using retail loyalty benefits will certainly lighten the load, they can ultimately only go so far.

“Let us not become complacent: now is the time to dish out the support needed to pull consumers back from the cliff’s edge. Support is urgently needed from businesses and the government alike. For businesses – namely retailers – that means cutting prices where possible and rewarding customer loyalty. For the government, cracking down on any instances of ‘greedflation’ is a must.”
 
Andy Mielczarek, Founder and CEO of SmartSave, a Chetwood Financial company, said: “Although the picture appears to be improving in certain corners of the economy, there is still a long way to go before inflation returns to manageable levels. Rising wages are finally easing pressure on some UK households, but savers could be in for a shock next month if inflation figures rise again.

“With further interest rates hikes already in the pipeline, savers should be mindful of the fact that banks still aren’t passing on every increase to their customers in the form of better rates. Those who haven’t checked their current rate would be wise to do so, as they may need to act quickly to lock in a better deal.

“Rates on easy-access accounts are rising, but they are still lacklustre compared to fixed-term products. Many one-year fixes are currently topping the base rate providing greater returns for those who don’t need immediate access to cash.”

Paresh Raja, CEO of Market Financial Solutions, said: “Another step in the right direction, with today’s CPI drop following on from the smaller-than-expected base rate hike at the start of the month. But it might be a case of two steps forward, one step back; all the talk this week has been that we are in for a shock rise in inflation when next month’s data comes out on 20 September. Given the Bank of England’s next interest rate decision follows the next day (21 September) that will likely prove a hugely important 48 hours.

“For now, we should allow some positivity to permeate back into the property and lending markets. After a challenging 18 months, any time inflation falls should be welcomed, and we could see such good news reflected in the products and rates available to property buyers. Still, lenders must double down on a proactive approach to supporting brokers and borrowers who will be feeling the effects of high inflation and consistent base rate hikes. In turn, lenders can help the market return to a more buoyant state.”

 

Jatin Ondhia, CEO of Shojin, said: “It’s good news today, but there are strong rumours that next month’s data will show a rise in inflation once again. This story is far from over – Rishi Sunak and Jeremy Hunt’s target of bringing inflation under 5% by the end of the year is looking increasingly out of reach, and that will have implications on consumers, investors, businesses and the financial markets.

“Even with today’s fall, inflation remains high, and if indeed it does rise again next month, we have to expect the Bank of England to come hard with more interest rates hikes. As borrowing becomes more expensive, this will inevitably further impact house prices and property development. For investors, meanwhile, it is crucial they assess how well positioned their portfolios are to deliver returns amid stickier-than-expected inflation.

“Diversification will likely remain a watchword for investors. Predicting quite where interest rates and inflation will go in the months to come is difficult, so many people will opt to diversify their investments so they are not tied too closely to any particularly market forecasts.”
 
Rachel Winter, Partner at Killik & Co, said: “This fifth consecutive month of falling inflation will lead to a sigh of relief for many, particularly as it may stop the Bank of England opting for another rate hike in September.

“While it’s great to seeing inflation coming down, it remains above the rate of interest being paid on savings accounts, and therefore cash savings continue to be eroded in real terms. Those in the fortunate position of having excess savings should consider investing in assets that can generate a greater or more tax-efficient return than cash.”