The latest UK CPI data has been released this morning by the ONS revealing that headline inflation has now dropped to 2% for the year to the end of June – finally hitting the Bank of England’s target rate. Good news for sure.
But before we get too carried away thinking that an interest rate cut in August is bound to be a shoe-in, we must look for the fly in the ointment. And, as usual, it’s the print for core – or service – inflation – stubbornly stuck at 5.7% yet again this month which is causing concerns. So what does all this mean? Will it delay the expected cut to UK interest rates so desperately needed by consumers, businesses and borrowers in the fight against the cost of living crisis?
Experts from across the industry have been sharing their reaction to today’s inflation data, telling us what they think it means for financial advisers and their clients as follows:
Jonny Black, Chief Commercial & Strategy Officer at abrdn adviser, said: “Hitting the two percent target and maintaining it is a notable achievement, but savers and investors shouldn’t assume the fight against inflation is won. Continued economic volatility, along with pressures from a competitive jobs market, could cause inflation to rise again later this year.
“The recent fluctuations in prices also underscores the need for vigilance. Without clear signs that inflation is calming down for the long haul, we may find rate-setters rethinking the timeline for cutting interest rates.
“Through the lens of financial planning, taking proactive steps is often more effective than reactive measures. Advisers play a key role in guiding clients to build resilient, long-term financial plans that better safeguard against the impact of inflation and unpredictable movements, which is key to capital preservation.”
Nathaniel Casey, Investment Strategist at wealth manager Evelyn Partners, comments:
‘Despite headline inflation remaining in line with the Bank of England’s inflation target for a second consecutive month, June’s inflation data came in slightly warmer than forecasters had been expected, with a particularly sticky reading for services inflation which stayed at 5.7%.
‘Even as headline inflation remains within target for its second consecutive month, the continued strength in services inflation will likely remain a cause for concern for committee members at the BoE, heading into their next meeting which concludes with an MPC rate decision on 1 August.
‘However, it remains to be seen if this will be alarming enough to delay their first rate cut later into the year. Currently markets are only pricing in a 35% chance of a cut in August, while prior to this inflation print that number stood at around 50%.
‘Within today’s data, the category for clothing and footwear was responsible for nearly half of this month’s deceleration in the annual rate, with prices falling by 1.2% for the month of June, moderating the annual rate to just 1.6%. Similarly, the basket for food and non-alcoholic beverages continued to ease, decelerating to 1.5% on an annual basis.
‘This has helped drive the overall basket for goods firmly into deflationary territory with prices in this segment contracting by 1.4% over the last 12 months.
‘Meanwhile, it’s the services sectors of the economy which are still running hot, with an annual inflation rate of 5.7%. Within this, restaurants/hotels posted the strongest monthly print, with prices rising 0.9% compared to the month prior. As has been seen in previous locations during her tour, there is speculation that Taylor Swift’s ‘Eras tour’ that gripped the UK during June could be responsible for driving up hotel prices during the month.
‘However, looking forward:
- Ofgem has signalled a further £122 reduction in the energy price cap effective from July 1, this 7% reduction should help to further cool household pricing pressures later this summer and further cement headline inflation at a rate within the BoE’s target.
- The slowing trend in core CPI inflation remains broadly intact. Lead indicators, such as producer price inflation is also heading south.
- Cost-push led inflation from wages that feed into the service sector is also decelerating. In addition to weakening employment data, annual private sector wage growth slowed to 5.8% in April, down from a peak of 8.2% in June 2023.’
Karen Barrett, CEO and Founder of Unbiased said:
“Inflation remaining unmoved at 2% could be a sign that the Bank of England (BoE) will remain cautious at the next base rate decision in August, especially with expectations that prices will again rise later this year.
“Saving rates recently rose in July, so now is a good time to fix savings while you can still take advantage of generous rates that easily beat inflation before a potential base rate cut, which could cause rates to come down again.
“For those retiring soon or thinking about retirement, consider an annuity so you can have a guaranteed income for a specific amount of time or for life. A base rate cut could impact annuity rates, so lock in annuities while rates are still favourable. You can also get inflation-linked annuities that’ll protect income from inflation.
“Expectations of an August base rate cut have sparked a mortgage price war, yet experts are still split on whether a base rate cut will actually happen.”
Tom Stevenson, investment director at Fidelity International, said: “A second consecutive month of headline inflation at target makes a cut in interest rates on 1 August more likely but not yet a shoo-in. The key questions for the Bank of England rate setters remain persistently high service sector inflation and wage growth.
“It is a sign of how far we have come in the fight with inflation that today’s repeat 2.0% reading elicited a shrug. It is only 20 months ago that the UK was an inflation outlier with prices rising at 11.1%. But policy makers are more concerned with the pace of price rises in the service sector, which accounts for 80% of the UK economy, and which remained unchanged at 5.7%. Core inflation, excluding energy and food, was also flat at 3.5%.
“Tomorrow the focus will be on the employment data, which is forecast to show only a modest decline in basic wage growth from 6% to 5.7%. Wages are a key component of service sector inflation.
“The decision on whether to cut interest rates from a 16-year high of 5.25% next month remains on a knife edge.”
Lily Megson, Policy Director at My Pension Expert, said: “The first inflation figures post-election are a promising sign. For retirees and those planning their retirement, stable or target levels of inflation are crucial. But we mustn’t fool ourselves. Target inflation isn’t an immediate fix for years of savings-bashing price hikes.
“It’s therefore vital people are provided with the help and support they need to get fully back on track with their finances.
“Our new government should use this period of stability to move Britain out of ‘defence mode’ and reinforce financial education and guidance on savings and investments. With inflation under control, people can start to feel more secure about their future, but ongoing support and practical advice will be key in helping them regain their financial footing.”
George Sweeney (DipFA), investing expert at personal finance site finder.com gives his thoughts saying:
“As expected, inflation has remained steady at the Bank of England’s 2% target in June, with some level of stability returning to the UK economy, bolstered by a general election and a transfer to a new government in a transition that went as smoothly as possible.
“New Chancellor, Rachel Reeves has voiced support of a base rate cut, and there’s hope that this new data will be enough for the BoE to finally begin cutting interest rates at the next MPC meeting at the beginning of August. However, they may want to stall further, and tomorrow’s wage growth figures could be the final piece of this puzzle. If unemployment has continued its recent upward trajectory in June, and wage growth has stabilised, then all signs could point towards a base rate cut in the near future.”
Laura Suter, director of personal finance at AJ Bell, comments on the latest UK inflation figures:
“Bank of England policymakers may be cursing Taylor Swift, as fans spending on hotel rooms and in restaurants during her Eras tour is likely to be one reason that prices rose in June, meaning that overall inflation flatlined at 2% rather than fell.
“A fall to 1.9% had been predicted but didn’t materialise, putting the decision about a potential interest rate cut on 1 August finely in the balance. The odds are around 50:50 as to whether we will see the first rate cut from the Bank of England next month – a move that would be welcomed by the public and the new government alike. All eyes will now be on tomorrow’s wage figures as a further indicator of whether the Bank will start its rate cutting cycle in a couple of weeks. But hot on the heels of strong GDP figures and a warning from the IMF that rates may have to stay higher for longer in the UK, some will be forecasting no cut this summer.
“The other thorn in the Bank of England’s side is services inflation, which also held firm at 5.7% in June – unchanged from the previous month. This sticky element of inflation is of big concern to the Bank and even a small drop in the right direction would have given more confidence that now is the right time for interest rate cuts.
“But there are some big bright spots for consumers. Food and alcohol prices rose by 1.5% in June, compared to 17.4% a year earlier, showing just how much food inflation has been tamed. The football effect is likely to have played a part in that, with supermarkets discounting alcohol and snacks to lure in more customers during the Euros.
“Clothing prices also fell, as there were more sales on the high street. This is likely the result of the dismal weather in the UK, meaning that fewer people are shopping for their summer wardrobe, leading to sales in shops.”
Jatin Ondhia, CEO of Shojin, said: “With inflation already at the 2% target, the fact it has remained unchanged for another month will likely bring reassurance to investors. In recent times, the focus was on finding investment options that could outpace high inflation. Now, with inflation and interest rates both stable, investors can approach the second half of 2024 with greater clarity. “The expectation remains that the base rate will be cut twice this year, probably starting at the Bank of England’s next meeting on 1st August. But that is not a given – the Bank may fear another uptick in inflation over the coming months. So, investors need to remain vigilant, consider broader economic factors, including any new policies bought in by the new government, and then adapt their plans accordingly. “We should expect diversification to sit at the heart of many people’s investment strategies, with a focus on balancing different savings products and lower-risk investments with some higher-risk options to aim for greater growth in the medium- to long-term. The evolving investment trends throughout the rest of this year will be interesting to observe, especially given the more stable economic environment compared to 12 months ago.”
Rob Morgan, Chief Investment Analyst at Charles Stanley Direct, comments: “Inflation remains stable, balancing around the Bank of England’s 2% target as higher interest rates successfully exert a dampening effect on prices.
“But it’s not time to pop the Champagne corks just yet. There are two sides to the inflation story. While goods inflation, including food, has come under control, core CPI (excluding energy, food, alcohol and tobacco) looks set to remain higher, indicating lingering pressures. While the worst of the post-Covid inflation burst is behind us, a strong jobs market, buoyant wage growth, mildly improved British growth, and lingering supply chain issues may push prices up in the months to come. All eyes will be on Thursday’s data on wages, the key input into service inflation, before a decision can be made about a rate cut next month.
“Almost half of British DIY investors are not confident that inflation will remain on track, but the vast majority expect rate cuts to follow regardless. Many will be balancing both their portfolios and their household budgets accordingly, increasing their exposure to equities to ensure their investment outpace cash returns, ensuring they’re on the best mortgage rates, and chasing the best cash savings rates.”
George Lagarias, Chief Economist at Forvis Mazars comments: “On paper, UK inflation stabilising at 2% should be more than enough for the Bank of England to hit the launch button on rate cuts. However, we understand the central bank’s reluctance. Headline inflation is less important now than services inflation, which remained at 5.7%, roughly double its long-term average. China continues to deflate global durable goods, but this will probably eventually stop. As long as services inflation remains elevated, it will act as a significantly negative factor in the Bank’s rate cut considerations.”
Rachel Winter, Partner and Investment Manager at Killik & Co said: “Stability around the 2% inflation target is cause for a country-wide sigh of relief. This should be evidence enough for the Bank of England to push the button on a rate cut next month. The likely blocking factor in the last meeting – the UK general election – has been and gone, resulting in the type of decisive outcome that markets like; the pound has strengthened as a result.
“The positive string of good macroeconomic news has created a renewed optimism in the UK market. While football may not have come home, many British equities remain lions in their own right.”
