Inflation stayed above the Bank of England‘s target level in the year to August, with the rate standing at 2.2 per cent in figures released by the Office for National Statistics (ONS) on Wednesday morning.
The figure is the same as last month’s, despite economists having predicted it would rise. Consensus was that it would increase to around 2.3 or 2.4 per cent per cent, so the number is a little lower than expected.
Until July inflation had been falling consistently this year, following a peak of 11.1 per cent in 2022.
What will happen to inflation in the rest of 2024?
Economists have different predictions for what will happen to inflation through 2024, though most expect it to rise higher than 2.2 per cent.
According to a Bank of England forecast released last month, inflation will rise to 2.75 per cent by the end of 2024 and stay high for the foreseeable future.
Likewise, forecaster Pantheon Macroeconomics expects the headline rate to peak at 2.8 per cent in November.
What does this mean for interest rates?
The Bank of England tends to cut interest rates as inflation comes down towards its 2 per cent target. It finally cut rates from 5.25 per cent to 5 per cent in August after holding them at this level for a year.
It did however caution against expectations that a rapid series of cuts will follow.
“We need to make sure inflation stays low and be careful not to cut interest rates too quickly or by too much,” Governor of the Bank of England, Andrew Bailey, said.
At the moment, most economists do not expect that there will be a cut when the Bank of England Monetary Policy Committee (MPC) next meets on Thursday. The figures on Wednesday are unlikely to change that, as that they are not different enough to what was expected.
Experts predict the next cut will likely come in November or later.
“We expect the MPC to vote 7-to-2 to keep Bank Rate on hold at next week’s policy meeting. Rate-setters will note slowing inflation supports faster cuts but a solid labour market suggests caution. The MPC will signal further rate cuts are likely, but that policy will need to stay sufficiently restrictive,” said Rob Wood of Pantheon Macroeconomics.
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.
Fixed rates have been coming down across the board with major lenders all now offering a five year fixed rate below 4 per cent. Santander also launched a two-year fix below 4 per cent earlier this week.
Experts have said that the inflation figure is unlikely to change the direction of cuts.
“The downward medium trend in mortgage rates is clear; it is only the speed of change which is uncertain,” said Ray Boulger of John Charcol brokers.
Savings
Inflation effect on the Bank of England interest rate also impacts savers, because it can be influence savings rates. The lower the Bank of England rate, the lower the rates seen by savers – in general terms at least.
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. The best one-year fix is with Atom Bank at 4.85 per cent.
Pensions
Recent drops in inflation recently will have been welcomed by pensioners who have been struggling with the cost of living crisis over the past two years, especially those for whom the state pension makes up a large portion of their income.
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. With the Bank having cut interest rates recently because inflation is close to 2 per cent, rates may start to fall.
Inflation can also have an effect on the state pension. The state pension climbs each April in line with the highest of wage growth, inflation or 2.5 per cent under the triple lock policy, which the Labour Government has pledged to continue.
But given inflation is currently far lower than wage growth – which stood at 4 per cent during summer – it is unlikely to make a material difference.