Share your thoughts on our News & Insights section. Complete our survey to help us improve.

Personal finance

UK inflation falls to 7.9% – what it means for interest rates, mortgages, and the economy

UK inflation surprised on the downside for June, but what will it mean for interest rates, mortgages and the economy ahead?

Important information - This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 1 year old

It was correct at the time of publishing. Our views and any references to tax, investment, and pension rules may have changed since then.

The inflationary tide is now turning faster than expected and although consumers and companies might still struggle amid the wave of higher prices, it appears we’re wading out of the danger zone.

Headline UK inflation came in at 7.9% in the 12 months to June – down from 8.7% the month before. However, while this is encouraging, inflation is still almost quadruple the Bank of England’s target.

What’s next for inflation?

Supply chain challenges have been easing and as borrowing costs have risen, people have less money to spend. This should push down demand for goods and service further, which should help with rising prices.

Grocery inflation has dropped back very slightly and there has been significant relief at the petrol pumps as prices continue to fall.

Core inflation, which strips out volatile food and energy costs, is also moving in the right direction. It came in at 6.9% in the 12 months to June 2023, down from 7.1% in May.

In light of this morning’s inflation result, the pound fell back against the euro and the dollar. This was a result of traders assessing that the Bank of England (BoE) won’t have to raise rates as far and as fast as feared.

What could be next for interest rates in 2023?

Policymakers are still likely to heed red flag warnings about wage growth in the private sector. In the three months to May, it was on a steep trajectory of 7.7% – the largest growth since the pandemic.

There’s still concern that companies will continue to be under pressure to pass on wages hikes through to higher prices, especially with consumer spending proving so far to be more resilient than forecast.

That means the BoE is still likely to raise interest rates in August. But looking into the autumn, the waters are very muddy. It’s now looking less likely that rates will reach 6.5%, but instead might not even go as far as 6%.

What does this mean for mortgages?

This offers some small solace for more homeowners who need to remortgage or those waiting for a first step on the ladder.

Mortgage borrowers won’t have to wait for the next rate decision for this to have an impact. That’s because a change in expectations themselves would be significant and could see some better fixed-rate deals put back on the table.

What about the economy?

With the jobless total inching up by more than expected, employees might already be more reticent about demanding further big hikes. Plus, lockdown savings which were once piled up high, are being eroded, and consumers could well turn more cautious ahead.

It’s estimated that only around 40% of the impact of higher interest rates has already fed through to the wider economy. That means more policymakers might see a need to go careful with the interest rate tiller to stop the economy capsizing into a recession, and instead steer into a milder downturn.

This article isn’t personal advice. If you’re not sure if something is right for you, ask for financial advice.

Latest from Personal finance
Weekly newsletter
Sign up for editors choice. The week's top investment stories, free in your inbox every Saturday.
Written by
Susannah Streeter
Susannah Streeter
Head of Money and Markets

Susannah is a key contributor to our content. She follows changes in monetary policy movements and fiscal policies closely to assess the impact on financial markets and economic growth, and has extensive experience in covering technology stocks and the retail sector.

Our content review process
The aim of Hargreaves Lansdown's financial content review process is to ensure accuracy, clarity, and comprehensiveness of all published materials
Article history
Published: 19th July 2023