This week, inflation in the UK crept above the Bank of England’s famous (and some might say outdated) 2% target, and, predictably, the media went into overdrive. The headlines were filled with doom and gloom: the cost of living crisis is back and we’re on the brink of disaster again. But as is often the case with clickbait, the truth behind the numbers tells a different story. The data, in fact, offered some reasons for cautious optimism—particularly for anyone concerned about mortgages, house prices, and the broader economy.
Yes, headline inflation did rise slightly, but what really matters is what’s happening with core and services inflation—two key indicators that the Bank of England tracks closely to guide its policies. And here’s the good news: both of these measures cooled faster than expected. Core inflation, which strips out volatile items like food and energy, dropped from 3.5% to 3.3%. Meanwhile, services inflation, often seen as the stickiest part of inflation (because prices in sectors like hospitality and recreation are slow to adjust), fell significantly from 5.7% to 5.2%. This is a positive development that suggests the inflationary pressures squeezing households are starting to ease.
To put it in simpler terms, this isn’t just good news—it’s like finding a four-bedroom house for the price of a studio. The drop in services inflation was a particularly pleasant surprise, as economists had only expected a fall to 5.6%. The fact that it fell further is a strong sign that some of the most stubborn elements of inflation are finally beginning to loosen their grip on the economy.
In areas like Culture and Recreation, the inflation rate has begun to drop, and even in traditionally tough-to-shift sectors like Restaurants and Hotels, we’re seeing signs of deflation—a remarkable change given the persistent cost pressures in these industries. If this trend continues, we could see a knock-on effect on swap rates, which are the financial instruments used to price fixed-rate mortgages. Lower swap rates would likely mean cheaper fixed-rate mortgages, which could stimulate demand in the housing market, boost home purchases, and help to stabilise house prices that have been under pressure in recent months.
But let’s not get too carried away just yet. While we might be seeing some light at the end of the inflation tunnel, the broader economic picture remains complicated. Wage growth, for instance, is proving to be something of a double-edged sword.
This week, we saw total pay growth cool off a bit, which on the surface might seem like good news for inflation. However, regular pay growth—wages excluding bonuses—remains elevated, rising by 5.4%, outpacing the Bank of England’s expectation of 5.2% and significantly above the market consensus of 4.6%. This is akin to a bidding war in the property market, where prices keep going up despite efforts to cool things down.
Higher wages mean people have more money to spend, which fuels demand across the economy, making it harder for inflation to fall. The big drop we saw in services inflation this month might not continue at the same pace next month if wage growth continues to exceed expectations. It’s like trying to turn down the heat in a house while the radiators are still pumping out warmth. Something’s got to give.
Adding another layer to this complex economic puzzle is the UK’s position as a standout performer among G7 economies. This week’s GDP report showed that the UK economy grew by 0.6% in the second quarter, beating forecasts and reinforcing the country’s role as a G7 economic powerhouse. While this is good news in terms of recovery and growth, it also keeps demand high, which could prevent inflation from cooling as quickly as we’d like.
The productivity drop seen in the GDP report adds another challenge. The effect of this month’s rate cut hasn’t fully worked its way through the economy yet, which means we could see demand surge again as more money flows into the market. This could push inflation back up, or at the very least, make it more difficult for inflation to fall further. For the mortgage market, this economic tug-of-war means that rates may hover around their current levels for the foreseeable future, at least until there is more clarity on how inflation, wage growth, and GDP will interact in the months ahead.
Amidst all of this, there’s been a notable change in the Bank of England’s leadership. Professor Alan Taylor was appointed to the Monetary Policy Committee (MPC) on Friday, replacing Jonathan Haskel, who had earned a reputation as a “hawk”—someone inclined to favour higher interest rates to combat inflation. Taylor, however, appears to be cut from a different cloth.
Taylor’s research and past work suggest that he leans towards the dovish side of the spectrum, meaning he may be more supportive of lower rates to stimulate growth rather than higher rates to combat inflation. This could be particularly relevant as we approach the next meeting of the MPC, where the odds of a rate cut in September currently stand at around 45%. Taylor’s appointment could tip the balance towards a more accommodative stance on rates, which would be welcome news for anyone with a mortgage or those looking to buy.
It’s also worth noting that the appointment of Professor Taylor comes as Rachel Reeves, the newly elected Chancellor, begins to make her mark. Reeves, a member of the new Labour government, is eager to keep the economy growing and to solidify Labour’s reputation as the party of economic growth. Her fingerprints are all over this appointment, and she is likely to be rooting for rate cuts that will help keep the economic engine running smoothly, supporting growth, and making homeownership more affordable for first-time buyers and those remortgaging.
In the end, while the Bank of England is supposed to be independent, the political and economic pressures facing the country cannot be ignored. If rates do come down in the near future, how many first-time buyers, homeowners, or even those struggling with the cost of living will be concerned about the Bank’s independence? What matters to most people is the bottom line: are mortgages becoming more affordable, and is the housing market stabilising?
In conclusion, the media may be quick to sound the alarm on inflation, but the reality is much more nuanced. We’re seeing encouraging signs that inflation is cooling, particularly in key sectors like services, which could lead to lower mortgage rates. However, strong wage growth and the UK’s economic resilience may keep inflation higher than we’d like for a while longer. As always, it’s important to keep a close eye on the data, but for now, there’s reason for cautious optimism in the housing market and beyond.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
Author:
Founder and mortgage and protection adviser in Albion Financial Advice
Dariusz Karpowicz is a seasoned adviser in the financial services industry. After gaining valuable experience working with an established broker, he founded his own practice, Albion Financial Advice. This firm is dedicated to assisting clients in acquiring properties and advising on various mortgage options. Born and raised in Gdańsk, Poland, Dariusz moved to the United Kingdom in 2006.
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