The UK inflation rate has risen to 3.5% in the year to April. This is a significant increase from the previous rate of 2.6%. It is now at the highest level in over a year, as confirmed by the Office for National Statistics (ONS). Whilst an increase had been expected, the rate is higher than economists had predicted.
The factors causing the UK inflation rate to rise
The biggest factor behind this inflation jump was the increase in household bills. Gas and electricity bills, water rates and council tax all had price hikes. Water rates in particular had a shocking increase. The ONS has confirmed that water and sewerage prices rose by 26.1% in April. This is the biggest increase since February 1988. With households hit by so many increases at once, last month was dubbed ‘awful April’.
Other contributing factors were higher costs for vehicle duty, food and airfares. Airfares rose steeply by 27.5% in April. However, this has been attributed to the Easter holidays, which were towards the end of April this year compared with an overlap between March and April last year. Food price inflation rose by 3.4% in the year to April with cost increases for bread, cereals, meat and mineral water. Prices did ease, however, for eggs, cheese, milk and vegetables.
Services inflation, which reflects the performance of the UK economy, also rose. The figure increased from 4.7% to 5.4% in the year to April. This has been attributed to businesses having to deal with the increase in National Insurance contributions and the minimum wage increase. As many will have to pass on these higher costs in their pricing, this may also contribute to a higher inflation rate in the future.
It’s anticipated that these factors will continue to keep inflation over 3% in the coming months. This is significantly higher than the Bank of England’s 2% target. Inflation has, however, eased in some areas. Whilst fuel costs are still high, both petrol and diesel prices have lowered slightly. The average petrol price fell by 3p/litre and diesel fell by 3.1p/litre. Clothing and footwear prices fell by 0.4%, which the ONS believes is the result of shops having sales.
How will interest rates be affected?
The base rate currently stands at 4.25%. Two further cuts had previously been predicted by financial institutions despite the Bank of England’s more cautious approach. Following the release of the latest inflation rate figure, however, only one cut to interest rates is now being anticipated. Economists are forecasting a single cut to the base rate, possibly in September, from 4.25% to 4%.
Mortgage lenders use swap rates, which price in changes to the base rate and inflation rate, when setting their mortgage rates. As an increase in inflation had already been anticipated, lenders had accounted for this in their current mortgage prices. However, as the newly released inflation figure was higher than expected and the base rate will undoubtedly stay higher for longer as a result, swap rates are likely to increase. This, in turn, will likely lead to an increase in prices for mortgage products.
The latest inflation data for house prices has also been released. Covering the year to March, it shows that house prices have increased by 6.4% across the 12 months. This is believed to be a result of buyers rushing to complete their property purchases before the new stamp duty rates took effect at the beginning of April.
Get impartial advice on mortgage solutions
With higher household and business costs to worry about, you may be looking for ways to cut back on your outgoings. If you’re wondering whether you can get a better deal for your mortgage, just give us a call on 01322 907 000. Taking your current deal and circumstances into account, our brokers will have a look at all of the options available. For example, the possibility of a lower interest rate, the option to extend your mortgage term or changing the type of rate you currently have. Ensuring that you are aware of any costs involved in changing your deal and giving you impartial advice, you can then make the best financial decision for your needs.