- CPI inflation rose from 2% to 2.2% in July. On a monthly basis, it was down 0.2%.
- Core CPI (excluding energy, food, alcohol and tobacco) rose by 3.3% (down from 3.5%) and services inflation fell from 5.7% to 5.2%.
- What moved inflation
- What it means for savings and mortgages
- What it means for the state pension and annuities.
The ONS has released inflation figures for July: Consumer price inflation, UK – Office for National Statistics
Sarah Coles, head of personal finance, Hargreaves Lansdown:
“Higher inflation has had the most highly anticipated comeback since Abba, after the Bank of England repeatedly flagged that it was on the way, and that it wasn’t anything to get inordinately concerned about. This is no Waterloo. It actually came in marginally behind expectations, because economists were pencilling in a 2.3% rise.
It’s not massively welcome, especially for people hoping to be able to enjoy the new space in their budgets created by wage rises, but it’s not a huge upset either. It’s likely to be business as usual at the Bank of England in September, with rates on hold, so it’s unlikely to alter the picture significantly for savers and borrowers.
What moved inflation this month
Energy bills fired up the engine of inflation this month. The energy price cap actually fell £122 in July, to £1,568. However, it’s a far less significant slide than the £426 cut a year earlier. Replacing a massive cut with a smaller one in the annual figures automatically helps to push inflation up.
It reflects the fact we’re still wrestling with far higher bills than before the cost-of-living crisis kicked off, with gas up 68% and electricity up 45% since March 2021. It’s one reason why those on below-average incomes are still well and truly trapped in the crisis. The HL Savings & Resilience Barometer shows that around a third of people still have ‘poor’ or ‘very poor’ financial resilience, and among some groups the figure is even more striking – nine out of ten single parents on low incomes scored poorly for their finances.
Food inflation stayed low and level at 1.5%. It’s largely a reversion to typical food inflation, but after easing for more than a year, the first month when this didn’t happen is a trend to watch. It’s notable that milk, cheese and eggs were up in price, because these products have such a short shelf life that rising prices in the supply chain tend to get passed on more quickly than elsewhere in the supermarket. We will have to see whether this is a short-term blip, or whether the impact will spread further next month.
It was a mixed bag across the shelves, so its impact will depend on what you buy. The biggest risers in the supermarket were olive oil at 37.5% and cocoa and hot chocolate at 19.6% – both victims of difficult harvests. Meanwhile, the biggest annual price drops were for frozen seafood – down 8.1% and jams, marmalade and honey, down 5.4%, which is excellent news for fictional bears.
One factor helping keep rising inflation to a minimum was petrol prices. The average petrol price fell 14.4p per litre in a month to 144.4p per litre. Diesel was down 1.1p to 150.4p per litre, thanks to weak oil prices. It’s largely a demand-driven change, with traders concerned about a slowdown in China and economic weakness in the US, which could mean lower demand for oil in the coming months. However, overall, petrol prices were up 3.6% in a year, so motorists are still being stretched at the petrol pump. This hasn’t been helped by the fact the supermarkets are padding their margins on the forecourt, so they can manage prices more keenly on the shelves at a time when fickle shoppers are a flight risk.
What it means for savings and mortgages
The Bank of England was expecting a rise in inflation. It means this isn’t going to trigger a U-turn on Threadneedle Street, and we’re very unlikely to see rate cuts reversed in September – especially given the fall in core inflation.
However, the rate is unlikely to be cut during the month either, given the increase in inflation came on the back of unemployment figures that revealed the jobs market is looking healthier than expected, and wage rises continue to outstrip inflation. The market is still expecting at least one more rate cut before the end of the year – possibly two – but this is by no means nailed on.
For savers, this brings some positive news in the short-term, because in a competitive savings account over any period you can get a rate that’s well ahead of inflation.
However, the overall trajectory for savings rates is downwards, now the Bank of England is on a rate-cutting path, and we’ve seen a flurry of cuts to easy access accounts recently. The most competitive one-year fixed rate and easy access accounts are hanging on above 5%, but every other market has dropped below, and there’s only so long the hold-outs can cling on.
If you don’t need the money for a fixed period – from just a few months to five years – then it’s worth considering fixing it for the periods that suit you, and getting started as soon as possible, while there are still so many decent deals around. Don’t feel you have to pick a single account fixed for a specific period. For a lot of people, a pick-and-mix approach works, using different banks, savings accounts and cash ISAs for different periods, to build the savings mix that suits them best. If that sounds like an admin nightmare, it’s worth considering a cash savings platform, where you can manage it all in one place.
Mortgage borrowers on tracker rates are likely to have to wait for the next cut in their monthly payments. It was always going to take longer for rates to unwind than they did to build, but those whose finances are stretched to breaking point could be forgiven for getting increasingly impatient.
For those looking for a new fixed rate, or with a remortgage looming, the news is better. Mortgage rates have eased in recent weeks. Moneyfacts figures show the average two-year fixed rate mortgage is now at 5.67% – having dropped from a recent high of 5.97% at the end of June. They may well drift further south in the coming weeks, but expected rate cuts have already been largely priced in, so we can’t look forward to any major falls just yet.”
What it means for the state pension and annuities
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown:
“As widely expected, inflation has ticked up slightly to 2.2% but given how high it’s been in recent years, this isn’t major. It also makes it all the more likely that it will be next month’s wages data that determines by how much the state pension will be uprated under the triple lock. The most recent data came in yesterday, showing wage growth including bonuses was at 4.5%. If it remains the same next month that would give pensioners on the full new state pension an uplift of more than £500 per year.
Even though inflation has fallen back massively, it remains an important factor in people’s retirement planning. You could be retired for twenty years or more and you need to do what you can to preserve your pension’s purchasing power.
If you are in the market for an annuity, then level annuities offer higher starting incomes than their inflation linked counterparts. However, 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 £7,215 per year from a level single life annuity with a five-year guarantee. One linked to RPI on the other hand offers up to £4,541 as a starting income.
It’s a difference that may put off many people, but you need to consider the fact that inflation can move massively during the course of your retirement, and you may catch up in terms of income faster than you thought. Should high inflation return, the purchasing power of the level annuity income that once seemed so attractive could be severely stretched.”
