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