Higher energy bills pushed UK inflation up to 2.9% in July. We explain what the latest figures could mean for household finances and mortgages.
UK inflation increased to 2.9% in July, up from 2.6% in June, as higher energy bills placed renewed pressure on household finances. This is the highest rate in four months.
According to the Office for National Statistics, the Consumer Prices Index (the main gauge for inflation) rose by 0.3% during July, compared with an increase of 0.1% in the same month last year.
Housing and household services, including gas and electricity, were among the biggest contributors to the rise. This followed Ofgem’s 13% increase in the energy price cap, which took effect on 1 July and added £221 to the typical annual household energy bill, taking it to £1862.
Furniture prices and other household goods also contributed to the increase, although lower transport costs provided some relief.
How will the increase affect households?
Households are likely to feel the rise through higher gas and electricity bills. However, the figures also showed some encouraging news: food price inflation fell to 1.3%, its lowest level in almost five years.
Core inflation, which excludes more volatile items such as energy, food, alcohol and tobacco, remained unchanged at 2.6%. Services inflation also eased slightly, from 3.6% to 3.4%.
The UK jobs market is softening but not collapsing. Unemployment remained at 4.9% in July, while job vacancies continued to fall, albeit slowly.
Could inflation affect mortgage rates?
The Bank of England wants inflation to reach its 2% target. When inflation remains above this level, it may be more cautious about reducing interest rates.
The base rate is currently 3.75%, following the Bank’s decision to hold it in July. The next base rate announcement is due on 17 September. Although the latest inflation figure may reduce the prospect of an immediate rate cut, softer employment figures and slower private-sector wage growth could also influence the Bank’s decision. The outlook therefore remains uncertain. However, one of the major banks is predicting that the base rate will remain the same for the foreseeable future.
Mortgage rates don’t move solely in line with the base rate. They are also affected by swap rates, market expectations and individual lenders’ funding costs.
If your current mortgage deal is due to end within the next six to nine months, it may be sensible to review your options early. We can explain what is happening in the market, compare available products, and help you plan your next steps without any pressure to decide immediately. We're here to help.