UK inflation remained at the Bank of England’s target rate of 2% in June, according to the latest official data. While discounts on clothing helped offset higher hotel costs, the overall inflation rate remained unchanged from May, providing some relief after years of above-target inflation.
Clothing Prices Fall, Hotel Prices Rise
Clothing and footwear costs saw a decline due to increased discounting, while food and drink inflation also dropped sharply from recent highs. However, hotel prices jumped by 8.8% compared to the previous month, and restaurants saw price increases, contributing to upward pressure on inflation.
Pressure on Interest Rates
Persistent price increases in services, including restaurants and hairdressers, may influence the Bank of England’s decision on when to cut interest rates. Currently, the Bank’s base rate stands at 5.25%, the highest in 16 years, after sustained increases to control inflation.
The Impact on Households
Many households, like the Morgans in south-east London, are feeling the squeeze from rising mortgage costs. After their fixed mortgage rate expired, they saw an increase in payments by £5,200 a year. Families are adjusting their budgets, cutting back on holidays and other non-essential expenses.
The Housing and Rental Market
Rents in the UK increased by 8.6% in the year to June, nearing a record high. Meanwhile, house prices rose by 2.2% in the year to May, with the average home in England now costing over £300,000.
Future Interest Rate Decisions
The International Monetary Fund (IMF) recently warned that UK interest rates may need to remain high for longer than expected to control inflation. Markets have been anticipating rate cuts, but recent data has reduced the likelihood of a cut on August 1 to around 35%.