- CPI inflation held at 2.2% in August, as expected. On a monthly basis, it was up 0.3%.
- Core CPI (excluding energy, food, alcohol and tobacco) was 3.6% (up from 3.3% in July) and services inflation rose from 5.2% to 5.6%.
- What this means for markets and rates
- 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: August 2024 – Office for National Statistics
Susannah Streeter, head of money and markets, Hargreaves Lansdown:
What this means for rates
“Although headline inflation in the UK remains unchanged, a creeping up in core and services inflation will cause niggles of concern. Costs in restaurants and hotels have fallen back, but transport prices have shot up, particularly air fares. It seems that consumers are still ring-fencing available budgets for holidays and are willing to shell out for higher ticket prices amid a bunfight for seats. After dipping 10.1% in July, airfares jumped 11.9% in the year to August. It means airfares rose by 22.2% on the month, the second biggest rise since records began in 2001.
The rise in both core and services inflation may make Bank of England policymakers a bit more wary about voting for a back-to-back rate cut. It still seems likely that they will decide to keep interest rates paused this month, and instead wait to cut rates again in November and December. That is the scenario being priced in by financial markets, which see more than a 73% likelihood that rates will be kept on hold but that more cuts will come later in the year.”
Sarah Coles, head of personal finance, Hargreaves Lansdown:
What moved inflation this month
“On the face of it, inflation regained its balance and held steady at 2.2%, after last month’s bump. Dig a little deeper, however, and there’s plenty going on. The Bank of England will have a close eye on core inflation – which climbed faster than a month earlier. We already know there’s more inflation to come, especially after the rise in the energy price cap in October. The question the Bank will be asking is whether this will embed itself in core inflation – which would prove harder to shift.
Transport helped hold inflation up, with air fares rising an impressive 11.9%. They always rise during August, but this year was particularly striking. This August saw a major getaway, as demand for European travel was boosted by a summer washout at home, and we decided we couldn’t manage an entire summer without seeing the sun. The price of second-hand cars also pushed inflation up, on a monthly basis they managed a small rise, although they’re still 6.6% cheaper than this time last year.
Overall transport inflation was held down to some extent by falling petrol prices, 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. It means petrol and diesel are now actually cheaper than the same time a year earlier.
Food inflation has come off the boil, up just 1.3% in a year, bringing some relief at the checkouts. Unfortunately, in the vast majority of cases, it’s more a case of prices rising more slowly than actually falling. However, we have seen some key prices cut, including pasta down 3.8%, cheese down 4.7% and jams down 5.9%. At the other end of the spectrum, the biggest risers in the supermarket included olive oil, up 40.8% as the impact of poor harvests continues to be felt on the shelves. Cocoa prices have also been hit by bad harvests in West Africa, so the price of cocoa and hot chocolate is up 19.9% and chocolate up 10%. The Halloween haul could either be fairly sparse, or more disappointingly healthy this year.
Price rises at the supermarket hit lower earning families harder, because they spend a far bigger proportion of their income on the essentials than those who earn more. The HL Savings and Resilience Barometer shows that a household on a relatively low income – earning an average of £22,262 each year, will spend £2,590 of it on food and non-alcoholic drink – or around 12% of their entire household budget. Compare this to the highest earners, on an average of £78,394, who spend £4,318 – or just 6% on food and drink. It means an easing of food inflation will come as a particular relief to those on lower incomes.
What it means for savings and mortgages
The Bank of England is likely to keep a wary eye on core inflation and hold rates tomorrow, but cuts are still being priced in this side of Christmas. This has been taking a toll on savings rates, and aside from one hold-out in the 1-year fixed rate market, fixed rates have now largely fallen below 5%. You can still get 5% or more in couple of easy access accounts. However, with more cuts on the cards, it’s time to take stock of whether you actually need all this money close to hand. You should have easy access savings to cover 3-6 months’ worth of essential spending while you’re working age and 1-3 years’ worth in retirement, but for any cash you’re holding beyond this, it’s worth considering tying it up for the periods that make the most sense for your finances.
There are some really strong deals around, especially on short-term fixed rates, so you can still lock in a great rate. Don’t feel you have to pick a single account. If you need sums at various points over the next five years, you can take a mix-and-match approach, using different banks, savings accounts and cash ISAs for different periods, to build the savings mix that suits you. If you worry that you’d lose track of more than one or two accounts, you can consider a cash savings platform, where you can manage it all in one place.
Mortgage borrowers on tracker rates are highly likely to have to wait a while longer for the next cut in their monthly payments, and while there are still cuts priced in for 2024, they may well be wondering whether higher core inflation risks throwing more cuts into question in the coming months. It demonstrates just how much uncertainty is involved when you peg your biggest monthly cost to a variable rate.
For those looking for a new fixed rate, or with a remortgage looming, there’s better news, because mortgage rates have been on their way down. This time last year the average 2-year fix was 6.6%, whereas now Moneyfacts figures show it’s 5.48%. It’s one reason why mortgage approvals have risen, and buyers are returning to the market. For anyone counting the days to a remortgage, the news is better too. The HL Savings & Resilience Barometer shows that remortgagers are likely to be moving from a rate of 2%-2.5% to one under 5.5%. It’s still a doubling of the rate for many people, but given that some remortgagers faced a tripling of their rate overnight when rates were surging, they may well be counting their blessings.”
What it means for the state pension and annuities
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown:
“Inflation has held steady this month at 2.2%. With wage growth streaking well ahead, it seems more and more likely that last month’s 4% figure will be the one used in the triple lock for next year’s state pension increase. It’s next month’s inflation figure that is taken into account for the purposes of the calculation but with inflation taking a more settled pattern we aren’t going to see it shoot up to surpass wages in the next month. This puts pensioners in line for a £460 increase for those on the full new state pension and around £350 for those on a full basic state pension.
We may still be above the Bank of England’s 2% target but it’s a huge relief to see inflation settling down from the double-digit highs we saw just two years ago. The difficulties pensioners faced in managing their budgets during those difficult times show the importance of taking inflation into account when retirement planning. You could be retired twenty years or more and during that time you could see huge changes to prices, and you need to be prepared.
If you are in the market for an annuity that increases in line with RPI every year, then a 65-year-old can currently get up to £4,468 per year if they have a £100,000 pot according to the latest data from the HL annuity comparison tool. This is still far lower than the £7,102 available for a single life level annuity so there are careful decisions that need to be made. Do you go for the lower starting income and the knowledge it will increase over time or do you opt for the higher one and hope inflation does not soar?
There are of course other ways of injecting a bit more flexibility into your plan. You don’t have to annuitise your whole pension on one day. Instead, you can annuitise in stages throughout your retirement. This gives you the potential to leave part of it invested where it can grow further. You will also benefit from higher annuity rates as you age, which will boost your income. To make sure you get the best deal for you it is vital to use an annuity comparison tool to shop around the market to make sure you’ve got the best rate.”
