The inflation rate figure has been confirmed for August 2023 at 6.7%. Lower than July’s rate of 6.8%, this has followed the pattern of the gradually reducing rate in previous months. Here, we’ll explain how inflation is measured, the anticipated base rate change and what impact the new inflation rate may have on your mortgage.
What is inflation and how is it measured?
Inflation is the increase in prices for services and goods over time. The rate of inflation is how quickly those prices increase. The Office for National Statistics (ONS) keeps track of inflation by checking the prices of a wide variety of items. This is done by using a ‘basket’ of hundreds of goods and services and recording their costs. These include everyday items, such as a loaf of bread, as well as more expensive ones, such as a car. What is placed in this basket continually changes based on the latest shopping trends. The total basket price is referred to as the Consumer Prices Index (CPI).
So how is the CPI used to calculate the current inflation rate in the UK? The CPI level, which is the overall basket price, is compared with the overall basket price from the previous year. The difference in this price across the year denotes the rate of inflation.
The current inflation rate in the UK
As mentioned above, the figure for the current inflation rate in the UK has been released at 6.7%. This is considerably lower than it was in 2022. The rate confirmed in August 2022 was 9.9%. Inflation hit a 41-year high last October when it rose to 11.1%. The base rate has increased 14 consecutive times since December 2021 in a bid to combat the high inflation rate. Although the effects of increased interest rates can take between 18 months and 2 years to fully show, the decreasing rate of inflation is a sure sign that this method is working.
A recent forecast by the Bank of England stated that inflation is predicted to fall to 5% by the end of the year. Economists at Deutsche Bank, however, believe that inflation will fall faster than this. They have predicted a reduction to 4.6% by the end of 2023.
The predicted base rate change
Despite these positive signs with the current inflation rate in the UK, it has been predicted that the base rate will still increase this month. The Bank of England’s goal is to get the inflation rate back down to the target of 2%. As it takes so long for the effects of any base rate changes to have an impact on inflation, a further 0.25% increase to 5.5% has been predicted. However, it’s not expected that there will be too many interest rate increases after this to avoid the risk of recession. The current cost of living crisis with such high prices, slow wage growth, increased unsecured borrowing and rising unemployment all show warning signs of a recession.
How might the new inflation rate affect your mortgage?
Some mortgage rates have already been reduced by a handful of the UK’s biggest lenders. This is in response to the positive signs of a decreasing inflation rate. It’s hoped that other lenders will follow suit, which will be a huge relief for homeowners whose fixed-rate deals are coming to an end or those who are waiting to get on the property ladder. In fact, fixed-rate deals have recently fallen below 5% for the first time since July. This has sparked competition between lenders that’s been dubbed a mortgage war.
To discuss your existing mortgage deal or to enquire about a new one, give our mortgage brokers a call on 01322 907 000. They’re ready to check your current situation and find a mortgage solution that better suits your needs.