The current UK inflation rate has remained at 2.8%. Once again, this rate is unexpectedly lower than the predicted 3% and is a result of higher transport costs being offset by slowing food prices.
Inflation is lower than expected
For the second consecutive month, the figure released by the Office for National Statistics (ONS) has been lower than anticipated. With global oil prices rising as a result of the Middle East conflict, an increase to 3% had been projected. Instead, a day ahead of the next Bank of England (BoE) base rate review, it has held steady at 2.8%.
Factors that have affected the current UK inflation rate
Transport costs were the biggest contributor to the inflation rate, with an increase of 6.8% in the year to May. This figure was up from 4.5% in April and is the highest since December 2022. The main causes of the increase were air fares, motor fuels and sea fares.
Air fares increased by 10.3% between April and May this year. This was significantly higher than the same two months last year, which experienced a 5% fall. This was partly due to the timing of Easter and the school holidays and an increase in the cost of flights, particularly European ones.
Motor fuel prices soared by 24.6% in the year to May, which is the highest increase since September 2022. The average price of petrol between April and May increased by 0.6p a litre. It now stands at an average price of 157.4p per litre, making it the highest price since November 2022.
The cost of ferry tickets also increased at a rate of 3.4%, compared with a significant fall of 10.2% the previous year. Just like the increase in air fares, this is believed to be due to the timing of Easter.
All of these increases have been offset by a decline in food prices and the cost of domestic heating oil. Food inflation fell to 2.2% in the year to May from 3% in the year to April. This is the slowest food inflation rate since December 2024.
How will interest rates be affected?
Whilst it had been hoped that the inflation rate would come down to the BoE’s target of 2% by spring, the conflict in the Middle East has derailed this. The current base rate is 3.75% and, now that inflation has remained at 2.8%, it’s expected that the base rate will be held, too.
The effects of the disruption to energy supplies have yet to filter through, with expectations of future increases in inflation. However, with the lower-than-expected inflation figures having just been released, the case has been strengthened for the Monetary Policy Committee (MPC) to vote to keep the base rate at its current level.
The effect on mortgage rates
Tracker and other variable rate mortgages fluctuate with the base rate, which means that if the MPC votes to hold it at 3.75%, your payments should stay the same. With the possibility of future increases in inflation, however, it’s worth considering what other options are available to you in case interest rates increase as a result.
Fixed rates for residential mortgages have been easing and with the announcement of a peace deal, there may be further reductions to swap rates. This will result in lenders reducing their interest rates, leading to cheaper mortgage deals for borrowers.
If you currently have a fixed-rate deal, your payments won’t be affected by inflation or the base rate decision. However, if your deal is coming to an end within the next 6 months, it’s recommended to be proactive and lock in a new deal ahead of time. You can change to another deal if a better one becomes available before your current one ends but doing this now gives you peace of mind that you have secured a new deal while mortgage rates are easing.
Get in touch to review your options
Our expert brokers are here to discuss your mortgage preferences and help you secure the most suitable deal for your needs. Give us a call on 01322 907 000 to benefit from comparisons of deals across the market, including exclusive broker-only deals, and impartial advice, ensuring you make the right decision for your circumstances.