Inflation has fallen to 2.6% in the year to June and is unexpectedly lower than the forecast rate of 2.7%. The current rate is the lowest it has been since March 2025.
Why has inflation fallen to 2.6%?
The fall from 2.8% to 2.6% is predominantly due to a drop in fuel prices, particularly diesel, according to the Office for National Statistics (ONS). This was helped by the short-lived ceasefire in the Middle East conflict. Petrol prices fell for the first time since the Middle East conflict began. The cost dropped by 2.1p per litre, making the average price 155.3p. Diesel prices had a more significant drop of 10.7p per litre, bringing the average price to 176.4p.
Food and non-alcoholic drink prices also fell, with a 0.2% decrease from May to June. The main foods that helped to ease inflation were chocolate, margarine and beef.
Clothing and footwear prices also decreased in the year to June. This was by 0.5% compared with a smaller decrease of 0.2% in the year to May. This change was expected due to the summer sales, with prices being cut more this year than they were for the sales at the same time last year.
Will inflation continue to fall?
The drop to 2.6% from 2.8% in the year to May is welcome news and a step nearer the Bank of England’s (BoE) target of 2%. However, unfortunately, it’s not expected to continue to ease.
Instead, inflation is expected to rise again in the second half of the year. One factor contributing to this is the surge in energy prices, with energy bills increasing for households by 13% in July. Hostilities have also escalated in the Middle East, causing crude oil prices to increase.
The impact on interest rates
Economists are predicting that the current base rate of 3.75% will be held following the next review on 30th July. It’s expected that the BoE will want to wait to see the impact that the energy price cap increase has on the next set of inflation figures before making any changes to the base rate. The same applies when it comes to the uncertainty over the resumed conflict in the Middle East.
How does this affect mortgage rates?
Lenders use swap rates to price their mortgage products and these rates reflect the financial market’s prediction of the BoE base rate. This means that any potential changes to interest rates are already accounted for in the swap rates.
Therefore, it’s a good idea to compare the deals available now if your current one is due to expire within the next 6 months. You can lock in a new rate now that’s ready to start as soon as your current deal ends. But this rate can be reviewed so that you have the option to change it if a better deal becomes available before your current one expires. If interest rates go up instead, you won’t have to worry because you’ve already locked in a better rate.
We can review your mortgage options
We’re here to help ensure that you have the most suitable deal for your needs and circumstances. With access to the whole of the market, including exclusive deals that lenders won’t offer you direct, we can review your situation and compare the deals available. Call us on 01322 907 000 for expert, impartial advice and a tailored solution for your mortgage goals.