Introduction to Inflation
Inflation has increased again in July to 3.8 per cent, reaching its highest level since January 2024. The Consumer Prices Index (CPI) has risen steadily since its three-year low of 1.7 per cent in September 2024, and now sits at almost double the Bank of England’s 2 per cent target.
What’s the Latest on Inflation?
The headline inflation rate was slightly ahead of expectations and is nearly double the bank’s 2 per cent target. Core inflation – which excludes volatile items like food, energy & alcohol – increased from 3.5 to 3.7 per cent in the 12 months to June 2025, while services inflation remained at 4.7 per cent. Transport prices, mainly air fares, were the main driver of higher inflation, rising 3.2 per cent since last July, up from 1.7 per cent in June.
Impact of Inflation on Daily Life
Food and drink prices continued to rise for the fourth consecutive month, up 4.9 per cent in the year to June, but below the peak in 2023. Jim Bligh, Director of Corporate Affairs and Packaging, The Food and Drink Federation (FDF), said: ‘With high commodity prices, the new £1.4 billion packaging tax, and increased National Insurance costs, it’s no surprise that many food and drink manufacturers have seen their costs increase by 10 per cent or more this year. Manufacturers have absorbed as many of these costs as possible, but consumers will still see higher prices at the till.
What Does the Inflation Rate Mean for You?
Consumer prices inflation, known as CPI, measures the average change in the cost of consumer goods and services purchased in Britain, with the ONS monitoring a basket of goods representative of UK consumers. The Bank of England has a target to keep this at 2 per cent. An inflation spike has hit over the last two years or so, with the CPI rate peaking in October 2022 at 11.1 per cent. Rising inflation means the rate of increase in the cost of living is increasing. Any decline in the inflation rate is to be celebrated though, as it increases the chance of wages, investment returns and savings interest matching or beating inflation – delivering a real increase in people’s wealth.
Will Inflation Fall Again?
July’s CPI reading was higher than anticipated and surpasses the 3.7 per cent peak the Bank of England had expected in September. It also comes just a month after the Monetary Policy Committee voted to cut interest rates to 4 per cent. That inflation continues to be higher than the Bank’s target isn’t great news for households, but the main concern is whether it is a one-off or marks the start of another period of sustained higher inflation. Pantheon Macroeconomics expects CPI to float around 3.7 per cent level for the rest of the year.
Impact on Savings
Inflation means the value of interest earned on savings and investments falls in real terms. If inflation deters the Bank from cutting its base rate again, then there is a silver lining for savers as rates will remain at a higher level. However, rising prices erode the real value of people’s savings. Alice Haine, personal finance analyst at Bestinvest says: ‘Savings rates have already eased back significantly following five BoE rate cuts since last summer – a trend presenting a major challenge for real returns.
Impact on Mortgages
Homeowners and first-time buyers will see the latest inflation reading as bad news, as it means that the pace of rate cuts slows. Peter Stimson, director of mortgages at MPowered Mortgages said: ‘This latest jump in inflation will slam the door on the prospect of any meaningful reduction in mortgage interest rates in the coming weeks. Hopes of another base rate cut this year now look decidedly optimistic. The mortgage swaps market, which tracks interest rate expectations and is used by mortgage lenders to determine the fixed interest rates they offer to borrowers, had been suggesting that the next base rate cut might come in November.
Conclusion
In conclusion, the increase in inflation to 3.8 per cent in July is a cause for concern, as it exceeds the Bank of England’s target of 2 per cent. This rise in inflation will likely impact households, savers, and mortgage holders. While the Bank of England may consider cutting interest rates again, the current inflation rate may make it hesitant to do so. As a result, it’s essential for individuals to be aware of the impact of inflation on their daily lives and to make informed decisions about their savings and investments. By understanding the effects of inflation, people can take steps to protect their finances and make the most of the current economic situation.
