UK inflation held at 2.2% in August, matching expectations, with monthly growth up by 0.3%. While the headline figure remains stable, core inflation, excluding volatile sectors like energy and food, rose to 3.6%, up from 3.3% in July. Service inflation also increased, driven by factors such as transport costs, which could have significant implications for interest rates, savings, and mortgage repayments.
Rising transport costs driving inflation
Despite the stable headline figure, core and services inflation are on the rise, sparking concerns about the broader economic outlook. Susannah Streeter, head of money and markets at Hargreaves Lansdown, commented, “A creeping up in core and services inflation will cause niggles of concern…transport prices have shot up, particularly air fares.” Airfares experienced an 11.9% annual increase, with a 22.2% rise over the month—marking the second-highest surge since records began in 2001.
These increases in service inflation may give Bank of England policymakers pause when considering future rate cuts. Although the market currently expects rates to remain unchanged in the near term, the rise in core inflation has introduced more uncertainty about when and how quickly rates may be lowered later in the year.
Impact on savings and mortgages
The current inflation figures are creating uncertainty around interest rates, with savers and mortgage holders feeling the effects. Sarah Coles, head of personal finance at Hargreaves Lansdown, noted, “Cuts are still being priced in this side of Christmas…but this has been taking a toll on savings rates.” Fixed-rate savings accounts have dropped below 5%, with few exceptions. For those saving beyond essential reserves, locking into fixed rates may be worth considering before further rate cuts occur.
Mortgage holders on tracker rates may need to wait longer for relief, as cuts expected for 2024 could be delayed due to rising core inflation. However, those seeking fixed-rate mortgages may find better deals than this time last year. Moneyfacts reports that the average two-year fix has dropped to 5.48%, compared to 6.6% in 2023. This dip has helped boost mortgage approvals, as homebuyers return to the market.
Ben Thompson, deputy CEO of Mortgage Advice Bureau, pointed out, “Some mortgage rates are now as low as they were before the infamous mini-budget of 2022…though these cheap rates are mainly for those with larger deposits, the market is improving across all sectors.”
Property market resilience despite inflationary pressures
While inflation remains above the Bank of England’s 2% target, the property market has shown signs of resilience. Daniel Austin, CEO of ASK Partners, observed, “Various house price indices from August report steady growth, while transaction volumes remain healthy…Despite inflation remaining above the 2% target, the property sector has shown remarkable resilience.”
Nathan Emerson, CEO of Propertymark, shared similar optimism, stating, “The positive news from today’s figures is that inflation remains broadly in line with the Bank of England’s target of 2%, which means that people shouldn’t witness the uncertainty and rapid price rises experienced in 2022 and 2023.” He added, “This combination of steady inflation and potential future interest rate cuts could bring a new wave of confidence and affordability to the housing market.”
However, sustained inflation could continue to raise development costs, posing challenges for new projects. Austin highlighted that balancing inflation with efforts to lower borrowing costs is crucial for the property market’s future. With inflation pressures still lingering, the Bank of England faces the delicate task of managing inflation without stifling growth in sectors like housing.
The stability of inflation, while welcome, does not come without challenges. As landlords, investors, and savers navigate the changing landscape, the broader implications of inflation and interest rates will continue to shape the UK’s financial environment.
The ONS has released inflation figures for August: Consumer price inflation, UK: August 2024 – Office for National Statistics
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