The latest figures from the Office for National Statistics (ONS) confirm that UK inflation is still falling… just. The Consumer Prices Index (CPI) for August fell from 6.8% to 6.7%.
The drop came as a surprise to forecasters who had been predicting a slight rise due to increasing fuel prices. It did, though, mark a halting of the “sharp decline” the Bank of England (BoE) had been hoping for.
Falling inflation could help to curb a potential rise in interest rates, providing relief for mortgage holders. But the CPI is still well above the Bank of England’s (BoE) 2% target.
It’s important to remember too, that falling inflation doesn’t mean falling prices, just that prices are rising less quickly.
So, what does the latest news on inflation mean for your finances?
Keep reading to find out.
Inflation fell in August but is proving hard to predict
Before inflation peaked – at 11.1% in October 2022 – forecasts suggested a sharp fall in the second half of 2023. The BoE formerly expected CPI to return to its own 2% target toward the end of 2024. This has since been revised to the start of 2025.
But predicting where inflation will land month-on-month isn’t easy, with many external factors playing a part.
July’s CPI fall marked the second month that inflation has fallen quicker than anticipated, while August smaller fall also confounded expectation. UK inflation is now at its lowest point since February 2022 and yet it remains high compared to other advanced economies in the G7.
Inflation for July in the US was 3.2%, while it stands at 5.3% in the eurozone.
Despite inflation’s sharp fall, it remains too high
Deputy governor, and Monetary Policy Committee (MPC) member, Sir Dave Ramsden recently used a BoE speech to confirm that UK inflation “remains much too high”. He went on to confirm that “the MPC has consistently stressed that monetary policy decisions will address the risk of more persistent strength in domestic wage and price settling”.
These sentiments reflect those made by the BoE’s governor Andrew Bailey.
Bailey caused controversy back in February 2022 when he urged employers to show restraint when giving pay raises. He went on to say that “broadly”, workers shouldn’t be asking for big pay rises.
The governor doubled down on his comments in June 2023. He blamed “unsustainable” pay rises for high inflation and the MPC’s decision to raise interest rates. The base rate currently stands at 5.25%, with the next meeting due on 21 September 2023.
Lower-than-expected inflation could see a smaller rise in the base rate
The base rate is a tool the BoE use to control inflation. When the CPI is high, as it is now, the BoE raise the cost of borrowing to encourage saving, reduce spending, and hopefully reduce demand – and so prices.
The MPC has increased the base rate at 14 consecutive meetings but inflation remains high. There are also questions about the longer-lasting impact on the economy.
MoneyWeek recently reported on the latest UK economic forecasts. The economy is expected to grow 0.4% this year, up from 0.2%, and a great improvement on the recession originally predicted.
The outlook for 2024, though, has worsened, as the BoE’s hikes have a delayed impact on the economy.
Ignoring the noise and sticking to your plan is key
It’s important to remember that regardless of what is happening in the wider economy, sticking to your long-term financial plan is key.
Your plan is aligned to your long-term goals and values, so if your goals haven’t changed then your plan doesn’t need to either.
It can be all too easy to doom-scroll through news or social media and make knee-jerk financial decisions with far-reaching consequences. In fact, we recently looked at Why emotional decision-making could be costing you investment returns in which we spoke about just that.
Stock markets rise and fall daily and that is why your investments are for the long term.
Get in touch
The cost of living crisis is proving hard for many at the moment but maintaining a focus on your goals is key. If you would like help and reassurance, be sure to get in touch and see how our expert team can help you.
Please email enquiries@futureplanningwm.co.uk or call 01793 575553.
Please note
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. You could lose your investment. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
