- Inflation is not expected to veer significantly away from the target of 2% when June’s figures are reported next week.
- What we’re likely to see.
- The impact on savings.
- What it means for annuities.
- How mortgages are affected.
Inflation figures are out on 17 June.
What we’re likely to see
Susannah Streeter, head of money and markets, Hargreaves Lansdown:
“Inflation is not expected to veer significantly away from the target of 2% although a slight creeping up of prices is expected towards the end of the year. However, what continues to keep some policymakers at the Bank of England hot under the collar is the tight jobs market, which has meant wage inflation has stayed steamy. Although unemployment has edged up to 4.4%, average wages (excluding bonuses were still rising at 6% in the February to April period. Elevated inactivity rates, partly due to high numbers of long-term illness are partly to blame. The concern is that if this pay pressure continues employers will pass on the cost of higher wage bills and push up the price of goods and services. Huw Pill, the Bank of England’s chief economist is the latest to warn about the persistence of inflation.
There are some glimmers of hope that onerous costs in the services sector which have been particularly stubborn are starting to ease. The S&P Global UK services PMI survey indicated that growth cooled off in June and that input prices for firms rose at the slowest pace in more than three years. This snapshot has helped keep hopes alive that an interest rate cut could still come on 1 August, but the decision will be on a knife edge with financial markets now estimating that there’s a 50% chance this will happen. So, there will be a lot riding on not just the headline rate of inflation, but whether a digger deep into the numbers shows services inflation is in a sharp enough retreat.’’
The impact on savings
Mark Hicks, head of Active Savings, Hargreaves Lansdown:
“It’s a perfect scenario for savers at the moment with inflation continuing to fall and savings rates treading higher in recent weeks. Both easy access rates and fixed terms have started to creep up in July, driven by intense competition at the top of the market which savers should be taking full advantage of. This means savers are consistently getting above double the rate of inflation returns, which increases the attractiveness of holding cash in your portfolio. As we get closer to the timing of the first few rates cuts the market may swiftly get ahead of itself, and any inflation print below expectations, will fuel that trend. There are still multiple fixed and easy access rates across the savings market that offer returns in excess of 5%. As we get closer to a base rate cut, I’d expect to see the easy access market implement cuts much more swiftly. However, the recent increase in competition at the top of the market could present a pleasant surprise as savers are presented with some very attractive products for that little bit longer.”
What it means for annuities
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown:
“Low inflation is important for anyone living on a guaranteed income such as an annuity. Over time it will nibble away at your purchasing power and so the lower it is the better. Pensioners have had a rough ride in recent years with inflation topping out at 11.1% – this didn’t so much nibble away at their income as bit out huge chunks and left many people having to make big cuts to their spending in a bid to make ends meet. However, even though the inflation beast looks tamed for now it doesn’t mean it shouldn’t be factored into your retirement planning.
Level annuities offer higher starting incomes than their inflation linked counterparts though a product linked to prices will grow over time whereas a level one won’t. The latest data from HL’s annuity search engine shows a 65-year-old with a £100,000 pension can get up to £7,217 per year from a level single life annuity with a five-year guarantee. One linked to RPI on the other hand offers up to £4,513 as a starting income. It’s a difference that may put off many people, but you need to consider the fact that you may be retired for 20 years or more, and inflation can move massively in that time, and you may catch up in terms of income faster than you thought.
Alternatively, if you don’t want to go down the inflation linked route you can look at annuitising your pension in slices over time. This enables you to secure higher incomes while you age while allowing the rest of your pension to remain invested and grow.”
How mortgages are affected
Sarah Coles, head of personal finance, Hargreaves Lansdown:
“Inflation is expected to come in roughly around 2% next week, which would be unlikely to change expectations significantly around the timing of the first interest rate cut. Right now, there’s around a 50% chance that rates will come down in August, and if not, it’s likely to be September.
This will be welcome news to anyone who remortgaged onto a variable rate early this year – when rate cuts were expected to be just round the corner – who will have been on tenterhooks ever since. However, movement isn’t likely to be quick, with no more than a couple of cuts in 2024. There’s also the chance of a longer pause if wages are pushed up by changes to the minimum wage or if economic growth surprises on the upside.
You’d be forgiven for thinking that bearing all this in mind, the fixed-rate mortgage market might be unmoved. However, we’ve seen some cuts in the past week or so, with a number of the biggest lenders cutting rates, and the average inching downwards. Part of this is a price war during a busy time for the markets ahead of the school holidays. Part of it is the fact that the first forecast rate cut is inching closer, and lenders are factoring in lower rates throughout the fixed period.
If you have a remortgage looming, this will be a welcome development. But with so many uncertainties ahead, it might be worth agreeing a rate now. That way if rates come down ahead of your deal expiring you can find a better offer, but if they drift up again in the interim you have locked in a more competitive deal.”
