UK inflation expected to rise to 3.8% tomorrow

Join us tomorrow morning

Thank you for following our preview analysis this afternoon. We will be back tomorrow morning, just before July's inflation report is published at 7.00am. To recap, here is what is expected:

• The rate of inflation is expected to jump again tomorrow, potentially hitting 3.8%.
• This would mark a 0.2 percentage-point increase compared to June’s reading of 3.6%.
• Summer spending could be partly responsible for the rise, including higher airfares and accommodation prices. Food prices have also been adding pressure in recent months, and this trend could continue in tomorrow’s report.

The Bank of England will also be keeping a close eye on core and services inflation to get a sense of how embedded inflationary pressures are in the economy:

• Core inflation strips out categories that tend to see short, sharp fluctuations in prices, like food and energy.
• Services inflation covers things like hotel stays, airfares, educational costs and more. Services make up around 80% of the UK economy, so this is an important measure.
• Core inflation is expected to hold steady at around 3.7% tomorrow, according to Deutsche Bank, while services inflation could creep up to 4.9% (compared to 4.7% in June).

All of this has important implications for household budgets and the Bank of England’s interest rate decisions – which in turn impact things like savings rates and mortgage rates. Join us tomorrow as we share the latest news and analysis.

How are investors responding to rising inflation?

Although inflation is expected to hit 4% later this year in September, interest rates have been coming down. A falling interest rate environment can encourage savers to invest their money, as cash returns start to look less attractive when savings rates drop.

Despite this, the investment environment remains complex, according to Charlie Ambler, co-chief investment officer at wealth management firm Saltus.

“While rate cuts should disincentivise saving, rising inflation and the prospect of further tax rises in the autumn are forcing investors to exercise a degree of caution. With economic growth slowing to 0.3% between April and June, policymakers must reassure investors and boost confidence in the economy in order to unlock growth,” he said.

“There are undoubtedly opportunities in interest rate sensitive sectors and UK equities, but we are seeing investors adopt a patient, disciplined approach with a focus on long-term returns.”

Rising inflation worsens the impact of fiscal drag

Rising inflation is bad news when it comes to taxes. Personal tax thresholds have been frozen since 2021, meaning more taxpayers are finding themselves in a higher tax bracket as inflation-related wage increases push them over the line.

Inflation also erodes the value of the tax-free personal allowance – the amount of income you do not need to pay tax on. This has been frozen at £12,570 since 2021.

This effect is known as fiscal drag. Critics often call it a stealth tax, as it causes income tax bills to go up, even when rates are left unchanged.

“Frozen tax thresholds affect everyone. With the personal allowance and higher-rate threshold frozen until 2028, this means that even lower earners will gradually pay tax on more of their income,” said Craig Rickman, personal finance expert at Interactive Investor.

“The noise around fiscal drag is likely to crank up over the coming months as the Autumn Budget heaves into sight. With the government at risk of missing its narrow, iron-clad fiscal rules, tax hikes could be in the offing.”

Rickman added that extending the freeze on tax thresholds beyond 2028 is “a way for the government to raise billions of pounds without technically breaking its manifesto promise not to raise taxes on working people”.

Can investing help you beat inflation?

If you are looking to beat inflation over the long term, you might want to consider investing a portion of your savings in a diversified portfolio of stocks, bonds and other assets.

There are some caveats – for example, you should be willing to keep the money invested for a minimum of five years to ride out short-term volatility. Before investing, you should also make sure you have paid off any high-interest debts and put aside enough cash to cover emergencies and any short-term savings goals.

While investing exposes you to market risk, stocks typically outperform cash over the long run and have a better track record when it comes to beating inflation.

Data from Barclays looking back over the past 120 years or so shows that equities have outperformed cash 70% of the time, based on a two-year holding period. If you extend the holding period to 10 years, it rises to 91% of the time.

It is important to invest sensibly across a diversified range of opportunities rather than putting all of your eggs in one basket. If you don’t feel confident picking your own investments, a ready-made fund could be a good option.

Our beginner’s guide shares some useful tips for those who are thinking about investing for the first time.

What would another inflation jump mean for savers?

Rising inflation is bad news for those with cash savings, particularly when coupled with interest rate cuts. Inflation erodes the real value of cash, as the pound in your pocket doesn’t go so far when the cost of goods and services goes up.

To protect your savings against inflation, make sure the interest rate on your savings account keeps pace with inflation, at the very least. Ideally, you should look to beat it. The top easy-access savings accounts are currently offering rates of up to 5%. Even if inflation jumps to 3.8% tomorrow, that means you can still earn a real return of 1.2%.

If you are happy to lock up your cash for a year or so, it could make sense to fix your savings to lock in higher rates for longer. Easy-access accounts tend to have variable rates that can drop with little or no notice, while fixed-rate accounts offer more certainty. The top one-year fixed-rate account with no minimum deposit requirement currently pays 4.25%, according to comparison site Moneyfacts.

What does rising inflation mean for your money?

At the basic level, rising prices means the cost of everyday goods and services is going up, stretching household budgets. This could prove challenging if your income isn’t rising at the same pace.

Although annual wage growth remains high, coming in at 5% in the latest labour market report, it is starting to slow as the jobs market cools. Survey data from the Office for National Statistics suggests businesses have been pausing hiring decisions, with some opting not to recruit new workers or replace those who have left.

“While workers may take comfort in the fact that pre-tax incomes are still growing faster than inflation for now… this is offset by a heavier tax burden and the risk that wage growth could slow further from here,” said Alice Haine, personal finance analyst at investment platform Bestinvest.

“With uncertainty around the timing of future rate cuts and businesses adopting more cautious hiring strategies – or turning to AI to plug skills gaps – consumers would be wise to adopt a prudent approach to expenditure,” she added.

Of course, it is not just household budgets that inflation impacts, but other areas of your finances like savings and investments too. More on that in our next post.

Inflation “much hotter than government and Bank of England would like”

Although inflation has slowed considerably from its peak of 11.1% in October 2022, it remains elevated. Victoria Scholar, head of investment at the platform Interactive Investor, points out that it is “much hotter” than both chancellor Rachel Reeves and the Bank of England would like.

This was reflected at the Bank’s latest rate-setting meeting, when policymakers voted to cut rates by a narrow 5-4 majority. Two votes were required before that verdict was reached. Commentators had been expecting a more decisive vote and, as a result, some have dialled down the tone of their forecasts going forward.

“Although we still expect another 25 basis-point cut in November, our call is made with much less confidence,” said Andrew Goodwin, chief UK economist at Oxford Economics.

“We think it wouldn't take much to convince the committee to pause for longer before cutting again. If inflation continues to surprise to the upside, this could tip the balance towards no change, particularly if market pricing moves against a rate cut.”

What’s driving price increases?

Summer spending could be partly responsible, if inflation jumps to 3.8% as expected tomorrow.

“There’s likely to be more upside in services momentum, particularly around airfares and accommodation prices, with the former supported by the timing of school holidays and the latter potentially flattered by an Oasis-related bump higher,” said Sanjay Raja, chief UK economist at Deutsche Bank.

Food inflation has also been adding pressure in recent months. Extreme weather has impacted harvests and higher employment costs are also pushing prices up.

“We expect food inflation to continue its ascent – but we do think we may be nearing the peak,” Raja said.

What to expect from tomorrow’s inflation report

Good afternoon and welcome to our inflation live coverage.

Households should brace themselves for another jump when July’s inflation report is published at 7.00am tomorrow. The Bank of England expects the headline inflation figure to jump to 3.8%, up from 3.6% in June.

Economists at Deutsche Bank are also expecting a 0.2 percentage-point jump compared to last month’s reading. Meanwhile, research firm Pantheon Macroeconomics is expecting a slightly smaller increase, bringing inflation to 3.7%.

Stick with us as we bring you the latest news and analysis, both in the lead-up and aftermath.