Inflation rose more than expected to 3.8 per cent in the year to July, according to figures released by the Office for National Statistics (ONS) on Wednesday.
The Consumer Prices Index (CPI) measure of inflation is now at the highest level it has been for over 18 months. The figure was 4 per cent last January and 3.6 per cent in the last reading in June.
Services inflation – a key measure of underlying price pressures for Bank of England rate-setters – came in at per cent.
The figure released today is well above the Bank’s 2 per cent target level.
Transport, particularly air fares, made the largest upward contribution to the monthly change, whilst food inflation was also up 4.9 per cent.
This was the fourth consecutive increase in the annual rate and the highest recorded since February 2024, but remains well below the peak seen in early 2023.
Economists had widely predicted that inflation would rise – partly due to an increase in food prices.
Inflation is widely expected to stay high this year, but economists are divided on how high it will reach.
The Bank of England has expected it will hit a peak of 4 per cent in September.
But others, such as economist Andrew Sentance, believe that it could go higher than 4 per cent, potentially as high as 5 per cent.
It is expected to stay above the 2 per cent target level for another two years, until 2027.
What does it mean for interest rates?
Higher inflation means prices are rising quicker than otherwise, and this can prompt the Bank to keep interest rates higher for longer.
Interest rates are currently at 4 per cent after being cut in early August.
Even though inflation is still well above the Bank’s 2 per cent target, there is a chance interest rates could be cut again later this year, though it hangs in the balance.
A cut in September is very unlikely, but the chance of a cut at the next meeting is at around 40 per cent, according to traders’ bets.
Mortgages
Mortgages are not directly affected by inflation, although many products are affected by the Bank’s base rate, which inflation influences.
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Fixed mortgages tend to follow swap rates, which work on long-term predictions for where the base rate will go.
Mortgage rates are broadly expected to fall modestly this year, though if inflation continues to rise and we don’t get any interest rate cuts, that could become less likely.
Savings
High inflation is bad news for savers as it erodes the value of money held in the bank. Therefore, the lower the rate, the better the news for savers.
The effects of inflation on the Bank’s interest rate also affects savers, because of the base rate’s influence on savings rates.
Savings rates have dropped in recent months, though it is possible to bag a deal that beats inflation.
For example, Chase offers an easy access accounts worth 4.75 per cent for current account holders – well above inflation – though this includes a temporary bonus rate.
Trading 212 offers a cash ISA account paying 4.42 per cent, though this also includes a temporary bonus.
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