UK inflation has remained at the Bank of England’s 2 per cent target for the second consecutive month. Some industry experts emphasise the need for careful financial planning due to “sticky underlying inflation pressures”, even though headline inflation has remained stable.
One expert suggests prioritising pensions over cash savings due to lower interest rates, citing possibilities for higher returns and tax efficiency.
Standard Life managing director for retail direct Dean Butler says: “Inflation has stayed at the Bank of England’s 2 per cent target. This will fuel ongoing speculation that we’ll see an interest rate cut as early as August.
“If and when this happens, lower interest rates are likely to have two immediate impacts – easing the pressure on people paying back loans and mortgages while leading to lower returns on cash-based savings. As a result, it’s worth mortgage holders coming to the end of fixed rate deals keeping a close eye on new deals coming to the market, if they’re thinking of refixing. It could also be beneficial for people finding themselves with a bit of extra money as a result of lower interest payments considering prioritising longer-term investments like pensions. Investments have the potential to provide more substantial returns than cash savings, particularly in a lower interest rate environment, and pensions have the added advantage of being highly tax efficient. A little extra now could have a big impact in the future.
“It’s all still speculation for now – but it’s always worth preparing for the possibility of changing economic conditions.”
Hymans Robertson head of capital Markets Chris Arcari says: “While UK headline CPI remains close to the Bank of England’s 2 per cent target, this largely reflects declines in energy prices and their interaction with the Ofgem energy price cap. Core CPI (which strips out volatile components such as energy and food prices), has also eased, but at 3.5 per cent year-on-year highlights some persistence in underlying inflation. This is further illustrated by services CPI, which though slowing, remains at 5.7 per cent year-on-year.
“Furthermore, in addition to much better than expected growth and activity data, UK business surveys highlight wage increases, shipping costs and rising raw materials prices contributing to rising costs. This suggests that service inflation is likely to remain sticky, while goods price disinflation has largely run its course. Indeed, headline inflation is actually forecast to start rising again, and reach 2.8 per cent year-on-year by the end of the year.
“Nonetheless, lowering rates doesn’t necessarily mean the Bank of England is adopting a stimulative stance. Given recent falls in inflation, monetary policy has continued to tighten through 2024 despite base rate being held constant, via rising real rates. This is despite the last rate rise coming in August last year. Put another way, still-elevated, but easing, underlying inflation pressures can be consistent with a gradual reduction in interest rates to slightly less restrictive levels.
“In light of recent positive growth data and signs of sticky underlying inflation pressures, markets have pushed back expectations for the first rate cut to the September MPC meeting. Markets now more or less fully expect two 0.25 per cent pa rate cuts by the end of the year. Whether the BoE cuts rates in August or September, we think that the key point is that the pace of rate cuts is likely to be very gradual given the current decent growth backdrop and stickiness in underlying measures of inflation.”
Fidelity International investment director Tom Stevenson says: “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 per cent reading elicited a shrug. It is only 20 months ago that the UK was an inflation outlier with prices rising at 11.1 per cent. But policymakers are more concerned with the pace of price rises in the service sector, which accounts for 80 per cent of the UK economy, and which remained unchanged at 5.7 per cent. Core inflation, excluding energy and food, was also flat at 3.5 per cent.
“Tomorrow the focus will be on the employment data, which is forecast to show only a modest decline in basic wage growth from 6 per cent to 5.7 per cent. 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 per cent next month remains on a knife edge.”
My Pension Expert policy director Lily Megson says: “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 feel more secure about their future, but ongoing support and practical advice will be key in helping them regain their financial footing.”