Inflation figures released yesterday have sparked speculation among economic and housing analysts, suggesting that another base rate rise may be on the horizon for next month. However, contrary to recent predictions of sharp increases, the latest data indicates a more moderate outlook.
The headline Consumer Price Index (CPI) inflation for June registered at 7.9 per cent, marking a steeper decline than expected from the 8.7 per cent recorded in May. Core inflation, which excludes energy, food, alcohol, and tobacco prices, also saw a decrease from 7.1 per cent in May to 6.9 per cent in June.
June’s rate of food inflation witnessed a decline from 18.3 per cent in May to 17.3 per cent, and remarkably, the cost of raw materials dropped by 2.7 per cent – the first time they have seen a decrease since late 2020, according to the Office for National Statistics.
While these figures offer a glimmer of hope, financial experts remain cautious about premature optimism. Sarah Coles, an expert from business consultancy Hargreaves Lansdown, warns that despite the falling inflation, the Bank of England is unlikely to shy away from implementing another interest rate hike in August, especially with concerns surrounding high wage inflation.
However, the decreasing inflation rate could lead the Bank of England to take a less aggressive approach to interest rate adjustments in the coming months, potentially impacting financial markets. The change in expectations alone could have a significant effect on savers and mortgage borrowers even before the next rate decision is announced.
Yael Selfin, chief economist at KPMG UK, predicts that while inflation may continue to fall in the near future, it will likely not return to the Bank of England’s 2.0 per cent target before early 2025. This projection suggests that the Bank is unlikely to dramatically shift its current hawkish policy stance on interest rates in the short term.
On the other hand, Thomas Pugh, economist at tax consultancy RSM UK, expresses a more confident view, asserting that the recent inflation numbers, combined with indications of a stabilizing labor market, could prompt the Bank of England to proceed with a quarter-point hike during its next meeting on August 3. Pugh further anticipates that inflation will continue to decline, supported by the ongoing impact of lower energy and goods prices.
Despite the dip in CPI inflation for June, Derrick Dunne, chief executive of YOU Asset Management, advises savers and investors to remain cautious. With inflation still nearly four times the Bank of England’s target and wage growth showing no signs of slowing down, the possibility of another interest rate hike in August cannot be ruled out. Central banks view rate rises as a primary tool to deter excessive consumer spending, making the situation even more complex.
As the economy faces the delicate balance of managing inflation and interest rates, analysts, businesses, and individuals alike will be closely monitoring the data and the decisions of the Bank of England in the weeks ahead.