🔔 Inflation rises for the first time this year – to 2.2%

The latest inflation figures are out, and the Consumer Prices Index (CPI) rate was up slightly in the 12 months to July 2024, compared to June – from 2% to 2.2%. One of the key reasons that inflation ticked up a little in July, was that the prices of gas and electricity fell by less over the last 12 months than they did the year before - but overall, the CPI increase was less than economists were expecting.

There was good news from the services sector, as services inflation slowed to 5.2% in July from 5.7%, which whilst mainly attributable to airfares and hotel prices slowing, may have been influenced by wages inflation too.

In a separate announcement, the Office for National Statistics (ONS) showed that annual wage growth which has remained stubbornly high, finally slowed, to 5.4%, down from 5.8% in the three months to June, which is the lowest for two years.

There was good news from the services sector, as services inflation slowed to 5.2% in July from 5.7%, which whilst mainly attributed to airfares and hotel prices slowing, may have been influenced by wages inflation too.

In a separate announcement, the Office for National Statistics (ONS) showed that annual wage growth which has remained stubbornly high, finally slowed, to 5.4%, down from 5.8% in the three months to June, which is the lowest for two years.

The reason that this is important is that the Bank of England keeps a close eye on wage inflation as it has a key impact on the UK inflation rate overall.

Although CPI is up a little, it was less than anticipated, so is unlikely to have too much of an impact on the Bank of England’s base rate decisions for the remainder of the year. However, there are still other concerns about inflation that could mean the Bank of England leaves the base rate at 5% at its next meeting on 19th September.

A delay in another base rate cut would be good news for savers, as savings rates have been cut prolifically since the reduction on 1st August. Whilst we would have expected savings providers to react, the speed and the number of cuts has taken even us by surprise. In the last two weeks there have been over 400 cuts, although in the main it’s been withdrawals of old accounts and reductions to the new issues of accounts, both variable and fixed. This means that savers in existing accounts have been less affected, so far!!

It feels like the banks have been waiting all year for an opportunity to start cutting rates, and there is likely to be more to come.

Just before the base rate cut on 1st August, four of the top five easy access accounts available to new customers, were paying at least 5%, even up to 5.20%. Today it’s just one account – the Principality Online Bonus Triple Access Issue 2 – paying 5%.

And it’s not just variable rate accounts that are being hit. Although we would have expected to see variable rates start to fall, what has really been surprising is the race to the bottom of the fixed rate best buy tables. Normally fixed rate accounts are priced based on what the markets are expecting, so the plethora of rate cuts could mean that even the banks and building societies were caught out by the August cut. It would appear that many were expecting the first base rate cut to happen in September, which could be why there has been a flurry of rate cuts.

On 31st July the top 1-year rate was 5.40% with Union Bank of India and the average of the top five was 5.28%. Today, the top rate is still Union Bank of India, but the rate is 5.25% AER.

There’s more urgency than ever to secure the best rates while they’re still around. And if you can lock away some of your money for longer, it could be a wise decision as you’re fixing at current rates in a falling market.

Even though the rates on longer term bonds and ISAs are lower than the short-term rates, whilst you may be earning less initially with these accounts, you could benefit in the long run as we don’t know what will be available in a year’s time and beyond if interest rates keep falling.

Plus, if inflation remains at least close to target, this cash could be earning an interest rate that is higher than inflation for longer.

In fact, although the base rate and the subsequent rate cuts may look bleak for savers, in real terms we are actually better off than we were!

Inflation in July 2023 stood at a substantial 6.8%, so higher than even the top rates available at the time. Although the top interest rates available now are lower than a year ago, so too is inflation. With inflation at 2.2% for the 12 months to July 2024 – which means that on average prices are rising at 2.2% a year, this is far less than it’s been over the last few years. More importantly the best savings rates are now paying comfortably more than inflation, which means that your savings can actually grow in real terms—something that wasn’t possible in previous years when inflation outstripped returns.

But that doesn’t mean you can be complacent, it’s still important to earn a competitive interest rate and remember to make sure you are being as tax efficient as possible, in order to make sure you are making your hard-earned cash produce as much as it can.