Inflation rises to 2.2% - what does it mean for your money?

The annual rate of inflation came in at 2.2% in July, marking the first rise this year.

The increase to UK inflation was widely predicted and is largely due to energy prices falling by less than they did a year before. 

This was partially offset by slowing fuel inflation, and a fall in restaurant and hotel costs.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

It means inflation is now above the Bank of England’s 2% target. In May, inflation fell from 2.3% to 2%, hitting the 2% target for the first time in almost three years. Inflation then stayed at 2% in June. 

Jonny Black, chief commercial and strategy officer at abrdn adviser, says the July inflation announcement “ends a brief two-month stint at target, and is a clear sign that savers and investors need to stay on their toes”.

A recent poll of UK investors showed that inflation was considered to be the biggest risk to portfolios. 

We look at the economic outlook, and what the latest inflation data means for you.

Why is inflation increasing?

The Consumer Prices Index (CPI) rose by 2.2% in the 12 months to July 2024, up from 2% in June 2024.

The biggest contributor to the rise came from the prices of gas and electricity, which fell by less than they did last year. The Ofgem energy price cap dropped by 7% on 1 July 2024. A year ago, households saw their average annual energy bills fall by a bigger amount of 17%.

However, despite an overall annual increase, some prices fell in the latest inflation data. Hotel costs fell this year having risen last year. The average petrol price dropped 14.4p per litre in a month to 144.4p per litre. Diesel was down 1.1p to 150.4p per litre, thanks to weak oil prices.

Food inflation stayed low and level at 1.5%. The biggest risers in the supermarket were olive oil at 37.5%, and cocoa and hot chocolate at 19.6%. Milk, cheese and egg prices also increased. In contrast, frozen seafood, jam, marmalade and honey saw a fall in their prices. 

Will inflation rise further?

Analysts expect inflation to stay above the Bank’s 2% target for the rest of the year, with potentially more increases to come. 

Suren Thiru, economics director at ICAEW, the Institute of Chartered Accountants in England and Wales, comments: “[The July increase] signals the start of a period of moderately rising price pressures, with greater demand from a recovering economy and higher energy bills likely to keep inflation above the Bank of England’s 2% target until next year.”

A recent survey of 54 economic forecasters by Bloomberg suggested that we could see inflation climb to 2.6% by the end of the year.

However, we’re unlikely to see a return to double-digit inflation any time soon. Inflation surged to 11.1% in 2022 in the wake of the Ukraine war and pandemic-related supply chain pressures.

The consultancy Capital Economics predicts that CPI inflation will be back below the 2% target from March next year.

When will the Bank of England cut interest rates?

Rising inflation can be a reason for the Bank of England to halt any interest rate cuts, and keep rates fairly high to try and bring inflation back down to its target.

However, the Bank will be digging into the data to find out how different prices are behaving, if there are any one-off events that caused an increase, and how the figures compare to their forecasts.

“The most striking thing about these data was that the decline in services inflation from 5.7% to 5.2% was much bigger than anyone anticipated,” comments Ruth Gregory, deputy chief UK economist at Capital Economics.

“Within services, the fall in restaurants and hotels inflation from 6.2% to 4.9% was bigger than the drop to 5.6% we had forecast. This will reassure the Bank that some of the recent stickiness in services inflation has been due to one-offs related to the influence of Taylor Swift’s concerts and the rise in the minimum wage rather than greater pricing power by firms.”

Meanwhile, core inflation (which excludes volatile measures like energy, food, alcohol and tobacco) dropped back from 3.5% to 3.3%.

With this in mind, Capital Economics thinks “interest rates will fall further and faster than markets expect”, reaching 4.5% this year and 3% next year.

Victoria Scholar, head of investment at Interactive Investor, adds: “The central bank is likely to continue to proceed with further rate cuts potentially this year and next, having reduced the bank rate at the start of August [from 5.25% to 5%] for the first time since 2020. 

“Markets are now pricing in around a 45% chance of another 25 basis point cut next month, up from 36% before today’s data.”

The next Bank of England interest rates meeting is on 19 September.

What the latest inflation figures mean for you

Prices are still rising overall - but you will likely have noticed a fall in prices such as at the petrol pump and on certain grocery items. Average energy bills came down last month too, thanks to a cut in the Ofgem energy price cap.

With the base rate more than double CPI inflation (5% versus 2.2%), savers are still able to pick from a wide range of inflation-busting savings accounts.

According to Moneyfacts, there are currently 1,558 savings accounts that beat inflation. This is in stark contrast to a year ago when CPI was 6.8%. There were no savings deals that could beat inflation back then.

Savings rates have been falling since the Bank cut the base rate on 1 August, so savers may wish to consider fixing and lock in a fixed-rate deal now.

Mortgage rates have also tumbled in recent weeks. The average two-year fixed mortgage rate is 5.66%, while the average five-year fix is 5.3%.

The investment platform Hargreaves Lansdown says mortgage rates could “drift further south in the coming weeks, but expected rate cuts have already been largely priced in, so we can’t look forward to any major falls just yet”.

Inflation can also have an impact on your retirement planning. While a CPI of 2.2% seems low, inflation could change massively during a 20-year retirement.

It’s worth bearing in mind if you’re weighing up whether to buy an inflation-linked annuity or a level annuity.

Inflation and rail fares 

The July inflation data is a key month for commuters. Laura Suter, director of personal finance at the investment platform AJ Bell, explains: “The annual increase in many rail fares is linked to the RPI measure of inflation and usually based on the July reading of that figure. This year it clocks in at 3.6%, meaning that could be the increase we all see on our season tickets next year.”

However, in recent years the government has deviated from the usual practice of raising rail fares by this amount every January by delaying the price increase as well as reducing it from the headline RPI rate. 

Suter adds: “Now inflation is back to more normal levels it may decide to return to the standard playbook of an RPI increase in January. The decision on this may be made today, or announced at the Budget in October, or be delayed until closer to Christmas.”