Inflation slows down to 6.8% - another rate rise?

The UK’s inflation rate dropped in July to 6.8% from 7.9% in June. This means the cost of living is still rising but now at a slower pace than previously. For many, this is on the whole good news. But does it mean the Bank of England will pause interest rates, or will they continue to rise? The jury is still out, but here’s what you need to know.  

The UK inflation rate is a mixed bag

The rate of inflation fell from 7.9% to 6.8% in July, primarily due to a drop in the cost of electricity and gas prices. The energy price cap, which caps the amount energy suppliers can charge, has been identified as the main reason for falling energy prices*.  

There is also good news in the supermarkets, with many food prices easing. Although, many staple foods are still much more expensive today compared to one year ago. Specifically, food prices are much higher today for sugar (54%), eggs (27%), cheddar cheese (23%) and sliced white bread (15%)*.  

On the other hand, a number of non-essential products (for most households) have increased, such as the cost of a flight, the price of eating out at a restaurant, and the cost of alcohol and tobacco. The cost of flights is particularly more expensive today than they were one year ago. In the 12 months prior to July 2023, the cost of flights has significantly increased on average by a staggering 30%*, making a holiday abroad even more of a luxury.  

Will the Bank of England raise the interest rate again?

The Bank of England has continually raised the base rate of interest from historical lows to an exponential rise to 5.25%, which is the highest it has been in 15 years. The base rate affects how much banks and lenders have to pay to borrow money from the Bank of England, which is then given to consumers in mortgages and other borrowing products. In other words, the increased borrowing costs are passed on to the public.  

The Bank of England increases rates to encourage people to borrow less and save more, which should stop prices from rising. The Bank of England’s target rate of inflation is 2%, but the actual rate of inflation has been – and continues to be – much higher. It is important to remember that although inflation has decreased, it has only slowed down and prices continue to rise. This is the reason many experts are predicting the Bank of England to continue with aggressive interest rate hikes.  

If you’re worried about paying your mortgage in the current climate, you can always call our mortgage advisers for advice and support. There may be more suitable alternatives available.  

*Source BBC News https://www.bbc.co.uk/news/business-66509365  

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September 2023