Despite some positive signs, the battle against inflation is not over yet. CPI inflation held steady in June, but services inflation remained higher than expected. So, what does this mean for the next base rate review?
Figures released by the Office for National Statistics (ONS) on Wednesday revealed that the Consumer Prices Index (CPI) inflation rose by 2% in the 12 months to June 2024, mirroring the rate in May. CPI inflation measures the change in prices of a basket of household goods and services, providing a snapshot of the cost of living.
While a 2% increase aligns with the Bank of England’s target for CPI inflation, signalling some stability, it’s important to look beyond the headline figure. The cost of living continues to rise, albeit at a pace that banks consider manageable.
Services Inflation Remains High
Services inflation, which covers sectors like hospitality and education, remains elevated at 5.7%. This means that everyday activities such as dining out, visiting hairdressers, and staying in hotels have become significantly more expensive.
The ONS data highlights a substantial rise in hotel prices over the past year, contributing to the persistent high services inflation. This indicates that while overall CPI inflation might be stable, specific sectors are still grappling with substantial price increases.
What about the base rate?
With the Bank of England due to review the base rate on 1 August, the latest inflation figures play a crucial role in shaping expectations. The base rate, which has remained at 5.25% since last August, is at its highest level in 16 years despite seven reviews. The base rate impacts mortgage interest rates and borrowing costs.
Some financial analysts had hoped for a potential base rate cut in August. However, the stubborn inflation figures, driven partly by high wage growth in an economy facing labour shortages, make this scenario less likely. According to a spokesperson from Quilter Investors, an August base rate cut is now ‘marginally less likely’, with a September cut appearing more probable.
Similarly, one of our mortgage advisers spoke with a senior economist from a top lender earlier this week, who had revised their position on when the base rate may reduce, shifting it back from their initial thoughts of August to September. This was largely based on how they felt the Bank of England would react to the CPI inflation figures.
Nevertheless, predicting future base rate changes with any certainty is impossible.
Mortgage Rates dropping
In contrast to the uncertain base rate outlook, there is some good news for homeowners. Mortgage rates have generally decreased over the past few weeks as lenders compete for business. Prominent lenders such as Santander, Yorkshire Building Society, TSB, Co-operative Bank, and Virgin Money have recently reduced rates on select mortgage products. Accord Mortgages, The Mortgage Works (Nationwide’s specialist lending arm), and MPowered Mortgages have also made reductions.
These competitive moves among lenders offer a glimmer of hope for those looking to secure more favourable mortgage deals.
While the CPI inflation rate might seem stable, the underlying inflation dynamics, particularly in the services sector, indicate that challenges may persist.
We will update you on the base rate review on 1 August and the subsequent review on 19 September.