Inflation remained at 2% in the 12 months to June, the same as in May, its lowest level since July 2021.
Economists anticipated that inflation would ease to 1.9% in June. Core inflation, which strips out more volatile food and energy prices, also held steady for the second consecutive month, staying at 3.5%.
Meanwhile, the Retail Prices Index (RPI) measure of inflation, which includes housing costs, eased slightly to 2.9% in the 12 months to June, down from 3% in May.
The largest upward contribution to the Consumer Prices rate of inflation came from restaurants and hotels, where prices of hotels rose more than a year ago. The largest downward contribution came from clothing and footwear, with the cost of clothing falling this year, having risen a year ago. You can learn about ways you might be able to reduce your food bills in our guide 21 ways to save money on your food bills and your clothing costs in our article 19 ways to cut clothing costs.
Myron Jobson, senior personal finance analyst at interactive investor, said: “The possibility of a cut to interest rates at the start of August hangs in the balance following the latest inflation reading, which came in slightly higher than expected.
“It was more of the same for key inflation data in June, with headline inflation, core CPI, and CPI services remaining unchanged from May. It is not the best inflation report for Bank of England policymakers, who are watching for further evidence that it has brought rampant inflation under control.
“Bank of England officials look at the full economic picture when setting interest rates. Metrics relating to labour market tightness, pay growth, and services price inflation are not quite where the Bank of England wants them to be to lessen the threat of entrenched inflation. Cutting interest rates too soon risks undermining the progress on inflation.”
What inflation means for you
High inflation increases the cost of our general living expenses, making it even harder for those on low incomes to make ends meet, so news that it has held at the government’s 2% target is welcome (although a fall would have been even better).
Wage growth continues to outstrip the rate of inflation, with pay excluding bonuses currently at about 6%.
Inflation and your pension
Although inflation holding at 2% in June will dominate headlines for the next few days, it is actually September’s inflation rate that is usually considered most important. That’s because the increase in prices over the year to this point is usually used to calculate the rate at which certain allowances and benefits, including the State Pension, are increased the following April.
Under the ‘triple lock’ guarantee, the State Pension is guaranteed to rise by the highest of September’s inflation figure, earnings growth, or 2.5%. Soaring wages outstripped inflation, which meant that the State Pension rose by 8.5% this April. You can find out more about this in our guide What is the pension triple lock?
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “Inflation has held steady at 2% providing much needed respite to pensioner budgets. However, even though it has fallen back massively it remains an important issue that needs to be factored into people’s retirement planning.
“Level annuities offer higher starting incomes than their inflation linked counterparts though a product linked to prices will grow over time whereas a level one won’t. The latest data from HL’s annuity search engine shows a 65-year-old with a £100,000 pension can get up to £7,217 per year from a level single life annuity with a five-year guarantee. One linked to RPI on the other hand offers up to £4,543 as a starting income.”
You can find out more about how different types of annuity work in our guide Annuities explained and about while it’s vital to do plenty of research before buying one in our guide Why it pays to shop around for your annuity. If you want to learn more about the impact of inflation on your retirement savings, read our article How does inflation affect my pension?
If you’re thinking about getting professional financial advice, you can find a local financial adviser on VouchedFor or Unbiased.
Alternatively, if you’re looking for somewhere to start, we’ve partnered with independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,000 reviews on VouchedFor, the review site for financial advisors.
What does it mean for interest rates?
The Bank of England raised the base rate fourteen consecutive times since December 2021 to try to dampen inflation, but the Bank’s Monetary Policy Committee has decided to leave rates unchanged at 5.25% since last August as inflation has gradually eased. With June’s inflation number holding at 2%, slightly higher than economists had anticipated, although many are hoping for a rate cut next month, it is by no means a foregone conclusion.
Alice Haine, personal finance analyst at BestInvest by Evelyn Partners, the wealth manager, said: “Homeowners and first-time buyers are likely to feel comforted by the latest inflation reading, as it raises the likelihood of a summer rate cut. Mortgage rates remain high but some major lenders have already started cutting pricing in anticipation of a rate reduction in the coming months. This may deliver the reassurance nervous first-time buyers need to push ahead with a purchase, while homeowners considering an upsize might be spurred into action.
“Lower inflation combined with strong wage growth and slightly more competitive mortgage rates means affordability levels have been improving for buyers as their money can stretch that little bit further, but a rate reduction could deliver even more impetus for movers sitting on the fence.
“A UK rate reduction as early as next month would deliver instant relief for new borrowers and those on trackers, but it won’t lessen the blow for those locked into fixed rate deals with some time left to run. Those on long-term fixes taken out before or during the early stages of the Bank of England’s rate-hiking cycle are likely to still face a jump in their repayments when they eventually come to refinance unless they have managed to clear a large chunk of their outstanding balance. A rate cut, however, may ensure the hit from a higher mortgage rate may not be heavy as once feared.”
If you’re worried about a potential payment shock when your current mortgage deal ends, read our articles When is the best time to remortgage? and Are you one of 1.6m homeowners facing a mortgage timebomb?
Want to speak to a mortgage advisor? Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage.
If you’re looking for expert mortgage advice, you can get a free consultation with an independent mortgage adviser at Fidelius. Speak with a qualified, FCA-regulated, independent mortgage adviser you can trust. Rated 4.7/5 on VouchedFor from over 1,000 reviews.
Impact on savers
Lower inflation benefits savers as it makes it easier to generate real returns. If you’re trying to save so that you have a financial buffer in place to cover rising costs, our articles How to build an emergency fund and Best instant access savings accounts may come in handy.
Mark Hicks, head of active Savings at Hargreaves Lansdown, said: “With inflation staying at 2% and coming in slightly ahead of expectations it’s a perfect scenario for savers. This will still ensure that the Bank of England decision in August is finely balanced, which means the savings market should remain relatively steady, as it has done all year. Both easy access rates and fixed terms have started to creep up in July, driven by intense competition at the top of the market which savers should be taking full advantage of. Savers are consistently getting above double the rate of inflation returns and this increases the attractiveness of holding cash in your portfolio.
“There are still multiple fixed and easy access rates across the savings market that offer returns in excess of 5%. As we get closer to a base rate cut, I’d expect to see the easy access market move much more swiftly, however the recent increase in competition at the top of the market could present a pleasant surprise as savers are presented with some very attractive products for that little bit longer over the summer months.”
High savings rates come with their own risks, however, as more people may unwittingly breach their annual Personal Savings Allowance. First introduced in 2016, when savings rates were much lower than now, the allowance has remained frozen since then with basic rate taxpayers entitled to £1,000 tax-free cash interest on savings outside of ISAs and those paying the higher 40% income tax rate awarded a £500 allowance. For additional rate taxpayers subject to 45% income tax, there is no Personal Savings Allowance at all. You can read more about the Personal Allowance in our guide What is the Personal Savings Allowance?
You can learn more about inflation and the impact it has on your finances in our guide What does inflation mean for my money? If you’re looking for ways you might be able to reduce your outgoings, read our articles How to save money – 21 money saving tips and Seven ways to save on your household bills.
Free financial support services
Millions of people are struggling financially at the moment, and although inflation is easing, many are still finding it difficult to manage their outgoings.
If your debts are starting to spiral out of control, contact Citizens Advice to help you find a way forward. You can speak to an advisor through its national phone service Adviceline on 0800 144 8848 if you’re in England, 0800 702 2020 if you’re in Wales, 0800 028 1456 if you’re in Scotland and 0808 223 1133 if you’re in Northern Ireland. Alternatively, contact any of the following specialist debt advice charities:
- National Debtline (telephone 0808 808 4000)
- Debt Advice Foundation (telephone 0800 043 4050)
- StepChange (telephone 0800 138 1111)
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