Inflation may look like it’s hurtling down a hill but it risks being snagged on the way by the surprise rise in wage growth.
The fall to 6.8% in the 12 months to July, from 7.9% in June, will be met with a sigh of relief during the cost-of-living crisis.
What’s next for inflation?
Energy bills are lower, and price rises are slowing at supermarkets. Unemployment is up from 4% in May to 4.2% in June, showing signs that the blast of cold air from higher interest rates might be dampening the labour market. Companies are showing signs of becoming more cautious about hiring workers with new staff appointments declining in July.
However, underlying price rises are still uncomfortably stubborn. If you strip out volatile food and fuel costs, there hasn’t been a slowdown. So-called core CPI (Consumer Price Index) flatlined at 6.9% in July, suggesting that overall inflation might not budge much more straightaway and it’s possible it might even tick back upwards.
How are wages impacting inflation?
In August, we usually spend more on clothing as people head back to school and work. And with sharp wage rises in the three months to June up to the highest level since comparable records began in 2001, this has led to expectations that consumers may spend more. This would leave companies with less incentive to be competitive and bring down their prices.
Industrial disputes between NHS workers and the government are also not helping the inflation fight. The number of people out of work because of long-term sickness has increased to a record high, and with painful waits for treatment not set to be cured any time soon, the fight for labour is set to go on, putting upward pressure on wages.
What does this mean for mortgages?
With many renters and homeowners facing grim jumps in housing costs, the small real term rise in salaries which has finally come through won’t give us much peace. But with around 37% of homes in England owned outright without a mortgage, a big chunk of the population are insulated from higher rates and likely to keep the tills ticking over.
What about the economy?
So, consumer spending may stay more upbeat than previously thought. This should bode well for companies selling discretionary goods – items we might want but don’t necessarily need. Some retailers are already posting better than expected guidance for this year.
While this may help prop up economic activity, it might cause more of a headache for Bank of England (BoE) policymakers. They have stressed that there needs to be solid evidence of inflation slowing before they can press pause on rate rises.
The data increasingly paints a picture of a stagflation scenario emerging for the UK - a combination of stagnation in the economy, strong growth remaining elusive and, inflation staying stubborn.
To keep inflation rolling in the right direction, it looks like it needs another push. So, the BoE is forecast to increase the base rate another 0.25% up to 5.5% in September, aiming to squash down purchasing power that bit more.
We may be a bit closer to the end of the rate rise cycle with the Bank forecasting inflation will fall markedly this year, but even when policymakers do press pause, higher rates are set to linger.
This article isn’t personal advice. If you’re not sure if something is right for you, ask for financial advice.
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