FINANCE
Caution: inflation at work
EXPERT COMMENT
The main driver behind the increase in the headline rate was the sharp rise in household bills. “Awful April’s” barrage of bill hikes saw consumers saddled with rises to energy, water, mobile and broadband bills along with higher council tax, car tax and Stamp Duty costs. Food in ation also rose as supermarkets came under pressure from rising costs. An uptick in the headline in ation gure is likely to be a source of concern for households who may be fearing a return to the dark days of rapid price rises that devastated household budgets during the cost-of-living crisis. Higher in ation diminishes spending power and erodes savings, making it dif cult for people to maintain the living standards they have become accustomed to. First time buyers may be disheartened, as it raises the risk that the pace of interest rate cuts may slow. There is some room for optimism, however. Mortgage rates are in retreat mode and property listings are on the rise, providing more opportunities to haggle on price. It means affordability levels are improving for some, which means new borrowers and those looking to upsize may have a better chance of securing the home they want.
High inflation means your money is worth less every month – Kay Hill explains what inflation is all about and how it can be managed
inflation up rapidly, with the MPC holding the Bank Rate in June, making it far less likely we will see significantly cheaper mortgages any time soon. HOW IS INFLATION MEASURED? The headline rate that we call “inflation” is the CPI (Consumer Price Index), which measures 520 different goods and services that ordinary people in the UK buy. These are reviewed yearly according to trends, so, for example, 2024 saw the removal of hand sanitising gel and the addition of air fryers, while vinyl records, removed 32 years ago, made a surprising comeback. This year, exercise mats,VR headsets and pre-cooked pulled pork made their debut. The increases (or occasionally decreases) in the cost of these physical items, and for services ranging from dental check-ups to phone bills, provides an
Anyone who has bought groceries recently will have noticed that prices are going up and up – a fairly obvious sign that inflation is at work. The two most recent inflation figures from the Office for National Statistics showed that in April and May inflation stood at 3.4%, which is higher than it should be – and everyone is feeling the effects. The Bank of England’s Monetary Policy Committee is tasked by the Government with keeping inflation at 2%, which it does by manipulating the Bank Rate (base rate). Put very simply, when the Bank Rate increases, mortgage companies and lenders increase the interest rates for borrowing, leaving people with less money to spend on goods and services. This reduces demand therefore discouraging price rises. At the same time, the interest rate on savings increases, so people are tempted to save rather than spend. At the beginning of 2025, inflation was falling – in January it was 3%, falling to 2.8% in February and 2.6% in March, so the MPC reduced the Bank Rate from 4.75% to 4.5% in February, and to 4.25% in May, prompting some reductions in mortgage interest rates. It was hoped by many that this process would continue, but instead, a series of Government decisions and external events have pushed
Alice Haine,
Personal Finance Analyst, Bestinvest
overall indication of rising costs. The ONS data can also show rises in particular areas, so, for example, it
126 First Time Buyer August/September 2025
Made with FlippingBook - Online catalogs