The Office for National Statistics (ONS) is expected to announced tomorrow that inflation fell slightly last month, giving some relief to those hit by the cost of living crisis and spiraling mortgage rates, and strengthening the view that interest rates will stay put.
The ONS will publish figures on Wednesday detailing how the average prices of goods and services changed last month.
The Consumer Prices Index (CPI), the official rate of inflation compiled by the ONS, has been falling steadily since the end of 2022, when it peaked at 11.1 per cent. By August it was 6.7 per cent.
The Treasury’s internal predictions are that the rate will stay flat, although S&P Global Markets estimates it will nudge down to 6.5 per cent, and Deutsche Bank’s analysis suggests a rate of 6.6 per cent.
S&P Global has said that continued deceleration in food price inflation will likely have contributed to the fall, and a spike in global oil prices will have prevented this fall being more dramatic.
Here’s what the falling rate means for you and your money.
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What will happen to interest rates?
Inflation is one of the main factors that influences whether the Bank of England chooses to raise or lower the base rate, which determines how expensive our mortgages are.
The base rate currently sits at 5.25 per cent, after the Bank opted to hold rates in its September meeting for the first time in more than 18 months.
The Bank generally raises rates to combat inflation. The logic is that if borrowing is more expensive, then people have less money to spend, and so there is less demand for goods and services.
After the recent hold, forecasters have suggested that, bar major surprises in inflation figures, rates should hold at their current level for now.
Ashley Webb, economist at Capital Economics, told i: “We still think interest rates are at their peak. That said, as we expect core inflation to fall only slowly, we think the Bank will keep rates at their peak until late in 2024.”
One thing that will give the Bank of England food for thought though is the high wage growth rate. Officials figures suggest that average weekly earnings, excluding bonuses, grew by 7.8 per cent in the three months to August – a higher rate than inflation.
Paula Bejarano Carbo, associate economist at NIESR, explained: “On the one hand, this is positive in that it implies that workers in both the public and private sectors are seeing real average pay increases in for the first time in roughly two years; on the other hand, elevated wage growth continues to challenge monetary policymakers’ efforts to tame inflation.”
Will mortgage rates go down?
Mortgages are not directly affected by inflation, although many products are affected by the Bank of England’s base rate, which inflation influences.
Fixed-rate products are not immediately affected by any change in interest rates, although they do go up or down based on long-term predictions of where interest rates will go.
These mortgages – generally the cheapest – are already slowly falling, as banks and other lenders have forecast that rates are at their peak, and there is a small “rate war” between lenders to attract business after a slow property market in the first part of this year meant many were behind target for deals secured. If inflation falls steadily as expected, then this will likely continue.
Rates of below 5 per cent have returned to the market recently – Halifax launched a five-year deal at 4.73 per cent last week. Nick Mendes, mortgage technical manager at John Charcol brokers has said that we could see a return to five-year fixes of under 4.5 per cent by the end of the month on current trajectories.
Elliott Culley, director at Switch Mortgage Finance said lenders would be trying “to get as much business in as possible before the end of the year” and that the mortgage market was “likely to remain competitive” in the short term.
Peter Stamford, director at Moor Mortgages, said that if inflation dipped “we could see rates inching down as lenders hustle for year-end business.”
What about my savings?
Inflation is bad news for savers as it erodes the value of money held in the bank. Even though the best paying easy access accounts are offering 5 per cent or more, inflation is still higher – meaning your savings are effectively worth less each year, comparatively speaking, even with the interest added.
The best two easy-access accounts are from Ulster Bank and Coventry Building Society, which each pay 5.2 per cent. You can get more money if you lock away your cash in a fixed-rate account. Ahli United Bank UK via Raisin has a one-year fixed account paying 6.1 per cent, but if you open this now you won’t be able to touch the money until October 2024.
Anna Bowes, founder of Savings Champion, has previously noted that falling inflation can help “mitigate” against this to an extent if interest on savings accounts stays the same.
What does inflation falling mean for benefits?
September’s CPI figure is also typically used as the figure to uprate working-age benefits such as Jobseeker’s Allowance next April.
This is not guaranteed, and on various occasions in the past decade, the government had opted for lower increases.
Whether it does so this time will likely be announced in next month’s Autumn Statement.
Though Chancellor Jeremy Hunt has been warned that freezing benefits would result in more children being pushed into poverty.
So inflation nudging down is good news in this sense, though it’s set to be a relatively small change.
How does inflation impact food prices?
While inflation is a measure of price rises, it accounts for a wide range of goods and services – including petrol, insurance and other varying costs – and does not affect them all equally.
Food inflation has been running higher than average price rises, however. In August’s ONS data it stands at 13.6 per cent. This is expected to be lower in this week’s reading, partly due to lower production costs filtering through to consumers.
And there is hope inflation could fall further, as today it was revealed that prices charged by food and drink manufacturers fell last month at the fastest rate in over three years, according to the Lloyds Bank UK Sector Tracker.
Different foods are going up or down in price at different rates though. For example, data from the Office for National Statistics shows that the price of sugar increased more than 55 per cent between August 2022 and August 2023, while the price of butter went down by 3.2 per cent.
Although food inflation has been falling in recent months, this does not mean food prices are decreasing. It just means they are increasing in price at a slower rate than before.
That means that the prices you see on supermarket shelves are unlikely to fall any time soon – at least, not just because inflation is falling.
What does inflation falling mean for your pension?
As with savings, higher inflation is generally bad news for people with pensions – or those currently saving for one – as it reduces the true spending power of their pots. If inflation is falling, that means that this effect is lessened.
For example, if you are 67 and plan to retire in a year, assuming you have a pot of £87,500 in today’s money – roughly the average someone older than 50 will have by retirement, according to Pension Bee – then one year later, if inflation runs at 10 per cent, and your investment growth is 5 per cent, your pot would be worth £91,263.
But in real terms, your pot would be worth the equivalent of £83,650, adjusted for today’s money.
However, there is a secondary effect of higher inflation. September’s CPI figure can be used to determine the State Pension increase for next year – although this is unlikely this time around.
Under the government’s Triple Lock policy, the State pension is increased in line with the highest of three measures – a flat 2.5 per cent rise, average earnings growth measured from May to July each year, and inflation measured in the year from September.
But inflation is set to be far lower than the average earnings metric – which was 8.3 per cent – and so this earnings figure will supersede the inflation reading.