ImproveShow HardThe Slowing of UK Inflation to a 17-Month Low at 6.8%
The inflation rate peaked at 11.1 percent in October of last year.
Nonetheless, it has been consistently diminishing since then. In April and May, it decreased to 8.7 percent. Then, in June, it unexpectedly dropped to 7.9 percent, and in July, it fell even further to 6.8 percent.
Market experts expected the downward trend to continue when the figures for August are revealed on September 18.
Some analysts even speculated that it might plummet to 6.1 percent.
If this were to happen, the Bank of England might have to think again about raising interest rates more.
Banks have already started lowering mortgage rates because they expect inflation to decrease. This could allow the BoE to start reducing interest rates in the spring.
In the United States, inflation is dropping at a considerably swifter pace. In June, it fell to a mere three percent, but in July, it experienced a slight uptick to 3.2 percent. The Treasury's recent forecasts suggest that a similar situation might be happening in the UK, but starting from a much higher level.
In July, prices went up unexpectedly in America. Analysts say it happened because housing and food costs are rising. The same concern exists in the UK, especially as rental prices reach new highs.
The Implications of Resurging Inflation
The return of inflation would cause problems for property prices, which are already going down. At the same time, mortgage rates would rise, making it harder for borrowers.
This would also be a big challenge for Prime Minister Rishi Sunak and Chancellor Jeremy Hunt. They promised to reduce inflation to five percent by the end of the year.
If the cost-of-living crisis is not resolved quickly, it could harm their chances of winning against Keir Starmer's Labour Party in the upcoming election.
Next week, Hunt is expected to raise concerns about the ongoing risk of inflation.
Forecasts show that consumer prices might exceed seven percent in August. This would likely lead to a base rate hike to 5.5 percent at the next monetary policy committee meeting of the Bank of England on September 21.
If inflation doesn't quickly decrease, base rates could reach six percent and more.
House prices have already fallen 5.3% in the year leading up to August. This marks the biggest annual decline since 2009, according to the latest Nationwide house price index.
The average home has lost £14,600 in value over the past year. It now has an average value of £259,153. This slowdown is expected to continue as mortgage approvals decrease by twenty percent.
The last thing the property market needs at this juncture is a more severe mortgage crunch.
There's another downside to consider. There was hope that Hunt would include a tax cut in this year's autumn statement. This was especially expected due to the slight improvement in the nation's finances.
Hunt's repeated stealth tax measures are expected to help HM Revenue & Customs collect an extra £40 billion this year.
Backbench MPs have been urging Hunt to alleviate the financial burden on households.
Rising inflation and interest rates will create a problem for the country's finances because it will cost more to pay off debt.
The Office for Budget Responsibility's estimates from March predict that interest payments on Government debt will reach a striking amount of £115 billion this year.
A large part of our debt is tied to inflation. When prices increase, our overall interest obligations also go up.
Higher inflation will increase the country's debt interest spending by about £20 billion per year. This money could have been used for important things like tax cuts.
This outlook is considerably bleaker than anticipated. It was expected that inflation would decrease in August and keep going down to about five percent by the end of the year.
Sunak and Hunt could have taken credit for reaching their target, even if they didn't fully achieve it themselves.
ImproveShow HardShould this optimistic scenario fail to materialize, disappointment will be widespread. If savings increase, inflation could reduce the value of those savings. Here's to hoping that the Treasury's forecasts prove to be inaccurate.
