The Office for National Statistics (ONS) will be publishing July’s inflation figure on Wednesday 14 August.
It is expected to show a slight increase from the 2% inflation recorded in June, remaining at the 2% target figure reached in May.
Indeed, in the minutes of the Monetary Policy Committee’s (MPC’s) meeting last week following its decision to cut the Bank of England base rate from 5.25% to 5%, it noted the impact from past external shocks had abated, “with some progress in moderating risks of persistence in inflation.”
However, while the committee noted that inflation had fallen back and remained at target, it is expected to increase to around 2.75% in the second half of this year, “as declines in energy prices last year fall out of the annual comparison, revealing more clearly the prevailing persistence of domestic inflationary pressures.”
Steve Clayton, head of equity funds at Hargreaves Lansdown, explained the 2% inflation figure is unlikely to last “because much of the fall so far has been due to some big increases in early 2023 dropping out of the calculations as 2024 draws on”.
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He noted that a survey of 54 economic forecasters by Bloomberg suggested we could see the headline figure climb back up to 2.6% by year end, before fading back to the target level in 2026.
“The July figure, about to be reported, could be the month where inflation starts to edge higher, because the pace of declines in utility prices is much weaker than a year ago. That could let stubbornly persistent services inflation make more impact on the overall number,” he said.
Clayton added that markets “know all this”, and if the figure comes in “no worse than 2.3%, we doubt investors will be too spooked by an edging-up”.
“Any signs of weakening service sector inflation will also be taken positively. But if we see prices ticking up much above that 2.3% level, investors are likely to start scaling back their expectations of how far and how fast the Bank of England will be able to make further reductions in their base rate,” he said.
What an inflation uptick means for savings and mortgages
Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “The expected rise in inflation is unlikely to frighten the horses, so it shouldn’t have an impact on the Bank of England’s rate-setters just yet.
“The Bank of England has issued plenty of warnings that a rise in inflation is on the way. The market’s expectations are baked into savings and mortgage rates, so they’ll only shift significantly if we get a notable surprise.”
What about annuities?
Lower inflation is good news for the new Labour Government, according to Helen Morrissey, head of retirement analysis at Hargreaves Lansdown.
“Inflation is one factor used in the state pension triple lock formula and has contributed to some blockbusting increases in recent years. This year, the figure used is likely to be wage growth, delivering a much lower increase to [the] state pension that will still beat inflation,” she said.
Morrissey added: “Even though inflation has fallen back massively, it remains an important factor in people’s retirement planning. You could be retired for twenty years or more and you need to do what you can to preserve its purchasing power.
“If you are in the market for an annuity, level annuities offer higher starting incomes than their inflation-linked counterparts. However, a product linked to prices will grow over time, whereas a level one won’t,” she said.
The latest data from Hargreaves Lansdown’s annuity search engine shows a 65-year-old with a £100,000 pension can get up to £7,215 per year from a level single life annuity with a five-year guarantee. One linked to the Retail Prices Index (RPI), on the other hand, offers up to £4,541 as a starting income.
Morrissey said: “It’s a difference that may put many people off, but you need to consider the fact that inflation can move massively during the course of your retirement, and you may catch up in terms of income faster than you thought. Should high inflation return, the purchasing power of the level annuity income that once seemed so attractive could be severely stretched.”
She added that for anyone who doesn’t want to go down the inflation-linked route, you can annuitise your pension in slices over time.
“This enables you to secure higher incomes while you age while allowing the rest of your pension to remain invested and grow,” she noted.
