Historically, gold has been regarded as a safe store of value against the potential for fiat currency to depreciate in value – in other words, as a hedge against inflation.

But for much of 2026 so far, higher inflation has coincided with lower gold prices.

“Gold was still up 6% over the year to the end of May,” said Joseph Greif, investment director at wealth manager Evelyn Partners, “but its recent behaviour has been uncomfortable for investors who expected it to protect portfolios immediately.”

Inflation has run hotter since the Iran war broke out, especially in the US. The US is a critical market for gold; the metal is priced in dollars, so its usefulness as an inflation hedge is implicitly measured against US inflation.

But while the Iran conflict pushed inflation higher, the price of gold fell. Between 27 February – the day before the war broke out – and 10 June, the price of gold fell 23%. Annualised US CPI inflation rose from 2.7% in February to 4.2% in May.

Why the gold price fell during the Iran conflict

Inflation is not the only dynamic that gold prices interact with. One of the key ones is interest rates, particularly in the US.

Gold pays no interest. That matters less to investors when interest rates are low, because alternative assets like bonds aren’t offering much interest themselves.

But once interest rates increase – or when markets expect them to – then gold loses appeal relative to interest-paying investments.

This is the main reason gold prices fell, both before and during the conflict in Iran. The price of gold peaked on 29 January at $5,595, around a month before the war broke out. The catalyst for prices to start falling from then was Donald Trump’s nomination of Kevin Warsh as the new chairman of the Federal Reserve (Fed).

Until then, markets had assumed Trump would nominate a ‘dovish’ chair for the central bank and that this would result in relatively loose US monetary policy (i.e. lower interest rates) – a positive for gold.

By the time the Iran war broke out, markets had already spent weeks pricing in higher interest rate expectations. And the inflationary shock that the Strait of Hormuz’s closure prompted only amplified those expectations.

“The prolonged conflict sparked severe inflationary risks, pushing US inflation to 4.2% in May,” Benoît Harger, portfolio manager at private bank J. Safra Sarasin, told MoneyWeek. “This data forced markets to price in potential interest rate hikes instead of cuts. It boosted the appeal of yielding assets and triggered a 30% gold correction from its January high.”

This isn’t necessarily out of character with how gold has behaved in the past.

“What lots of people don’t realise about gold is it sells off in a crisis, often because of liquidity,” Cosmo Sturge, director of market strategy at metals fund manager Baker Steel, told MoneyWeek. “You had a lot of investors who had made a lot of money in the run-up to the [Iran] war, and suddenly that change in the outlook for inflation and the knock-on effect for interest rates [prompted them to] sell gold.”

Could gold still help hedge against inflation?

Despite the selloff, most experts agree that gold still has a role to play in portfolios, particularly as a hedge against inflation.

Central bankers are currently more constrained in how high they can push interest rates than they have been in the past.

The Fed hiked interest rates to as high as 19% in the early 1980s to combat rising inflation. This coincided with a steep decline in the gold price, from around $650 in January 1980 to around $320 in June 1982. But these high interest rates damaged the global economy and would be unworkable today.

“Rates clearly can rise, but could they rise to those levels again? Could the Fed really have the firepower to be able to fight true inflationary crises through monetary policy?” asks Sturge. “I'm not sure. Debt to GDP is four times higher than in 1980. You've had a huge increase in the money supply in the US, which has obviously been fueling inflation.”

If it reached a point where the Fed couldn’t control inflation through monetary policy, then financial repression – government policies that keep rates artificially low, at the expense of savers and private businesses – would result.

“That is a very positive environment for gold,” says Sturge.

Similarly, Harger believes that gold remains an effective inflation hedge because it protects against long-term structural fragility. He argues that interest rates will eventually have to fall: “The global economy cannot sustain permanently high financing costs without triggering a recession. Furthermore, under-pressure growth and massive public deficits… limit long-term rate hikes.”

Gold, he says, will likely be a beneficiary of this eventual reduction in interest rates. “A strategic allocation may provide protection against sovereign risk and currency devaluation as rising debts force loose monetary policies.”

“Over the long term, gold being an inflation protection, I think, has held very well, but it tends to be more in terms of protecting your purchasing power rather than necessarily shooting sky high every time there's inflationary scare,” said Sturge. “It's driven by persistent debt growth: the fiscal deficits of the world, long-term currency debasement – these are the reasons why people hold gold.”

• The Office for National Statistics (ONS) has released UK inflation data for May 2026.
• Consumer Prices Index (CPI) inflation stayed at 2.8% in the 12 months to May, the same as in the previous month’s release.
• Economists had previously predicted a rise in inflation compared to the month prior.
• Lower food prices were one of the main counters to higher transport costs in May.
• The Bank of England’s (BoE) Monetary Policy Committee (MPC) meets this week to decide on UK interest rates and will watch today’s inflation data closely when making its decision.

| UK inflation forecast | What is inflation? | When will interest rates fall further? | CPI release dates | MPC meeting dates |

Good afternoon and welcome to live coverage of the upcoming UK inflation data release.

Tomorrow, we’ll find out how prices changed in the UK during May. Last month’s release showed a slowing of UK Consumer Prices Index (CPI) inflation in the 12 months to April, despite higher oil prices resulting from the conflict in Iran.

While oil prices have fallen this week following the announcement of a peace deal between Iran and the US, the expectation is still that the impact of the conflict will have pushed CPI inflation higher in the period the data covers. How great will the impact be – and what could it mean for your money?

When is UK inflation data released?

The Office for National Statistics (ONS) will release May’s UK inflation data at 7am tomorrow (17 June).

We’ll bring you live reporting and reaction following the release, as well as rolling coverage and expert views on what changes in inflation might mean for you.

What do experts predict for May’s UK CPI?

The headline CPI figure took a surprise dip in April, but few experts anticipate a repeat in the May UK inflation data.

Economists at advisory firm Pantheon Macroeconomics expect CPI inflation to have risen to 3.0% in May, due to the impact of recovering air fares and vehicle duty base effects.

“Most of the action comes in services,” said Pantheon Macroeconomics’ chief UK economist Robert Wood and senior UK economist Elliott Jordan-Doak in a report seen by MoneyWeek. “Non-core components should add 1 basis point to inflation in May compared to April, and core goods will shave off 6 basis points.”

Similarly, Sanjay Raja, chief UK economist at Deutsche Bank, expects CPI to rise to 3%, with most of the uplift driven by services inflation.

Both Deutsche Bank and Pantheon Macroeconomics forecast services inflation to rise from 3.2% to 3.7%.

Notably, both organisations forecast a lower rate of UK inflation for May than the MPC itself. In its latest report (published in April), the MPC forecasted CPI to rise by 3.3% in the year to May, driven largely by a 3.9% rise in services inflation.

UK inflation data to be followed by interest rates decision

UK inflation data is released once per month, and the Bank of England’s (BoE) Monetary Policy Committee (MPC) meets every six weeks to set UK interest rates.

This means every other MPC meeting and every third inflation data release coincide. Inflation data is released on Wednesdays and the MPC’s decision is posted on Thursdays, so when this happens the MPC announces its decision the day after inflation data is released.

That’s the case this week; the MPC’s interest rate decision will be announced on Thursday 18 June. The committee will factor tomorrow’s inflation data closely into its decision.

“Absent some huge surprises in this week’s inflation and labour-market figures, we think the MPC will say at Thursday’s policy meeting that they remain prepared to act but feel they can keep rates on hold for now,” said Robert Wood and Elliott Jordan Doak, chief UK economist and senior UK economist respectively at advisory firm Pantheon Macroeconomics, in a note seen by MoneyWeek.

Why small changes in inflation make big differences to your finances

Inflation measures the rate at which prices rise or, from another perspective, the rate at which money falls in value. One pound today buys less than it did ten years ago.

The MPC targets a 2% rate of inflation. This is generally viewed by economists as a healthy rate of inflation (too little inflation or, worse, deflation are signs of a weakening economy).

The difference between 2% inflation and 3% might sound trivial, but over the long term it has a surprisingly large effect on your money.

“People often assume there isn't much difference between low rates of inflation, but the rule of 72 shows how it can mount up,” says MoneyWeek’s editor Andrew VanSickle. “At 4%, your money takes only 18 years to halve in value. At 3%, 24 years. At 2% – the Bank of England's target – 36 years.”

UK inflation data history

The peak for UK inflation in recent history came in October 2022, when the headline CPI inflation measure hit 11.1%.

CPI inflation fell below the Bank of England’s 2% target in September 2024, before rising steadily over the next year.

Until the war in Iran broke out, inflation had been trending downwards. The war’s outbreak, though, pushed UK inflation to 3.3% in March this year – ahead of the dip in April.

Could the Iran ceasefire ease UK inflation in time to avert rate hikes?

The MPC will look closely at tomorrow’s UK inflation data when it meets this week. But this data is backward-looking – reflecting what happened to UK prices in May. The committee will also pay close attention to what is likely to happen to inflation going forward.

With that in mind, the ceasefire between the US and Iran, and the resulting re-opening of the Strait of Hormuz, could have come at the perfect time for rate-setters who had appeared set to decide between hiking rates, which risks stifling an already weakening economy, and cutting or holding them which could risk letting inflation get out of control.

“Falling oil prices have arrived at a convenient moment, giving both the [Federal Reserve] and the Bank of England something to work with ahead of their meetings this week,” said Chris Beauchamp, chief market analyst at investing and trading platform IG. “Cheaper energy takes pressure off inflation, and that should allow both central banks to strike a more measured tone than some of the more excitable commentary and market pricing seen since the US and Iran went to war.”

Your personal inflation rate

CPI inflation is just one way of measuring inflation. It is the headline rate measured by economists and policymakers largely because, of all the metrics, it is one of the easiest to compare internationally. For more information on different inflation measures, see our explainer on CPI vs RPI inflation.

All inflation measures have one thing in common: they distil an immensely complex combination of goods and prices across the whole economy into a single number. While that number in theory represents the economy as a whole, different people with different spending patterns will experience inflation differently from one another.

Everyone has their own personal inflation rate. You can calculate yours by answering a series of questions at the ONS’s personal inflation rate calculator.

“My personal inflation benchmark is the peppermint Aero,” says MoneyWeek’s editor Andrew VanSickle. “I paid 22p in 1988. Now it's 63p or so.”

Thank you for following today's live reporting ahead of tomorrow's UK inflation data release. We're pausing coverage here for this evening, but we'll be back live tomorrow morning to bring you the May inflation data as soon as it breaks at 7am.

Good morning, and welcome back to our live coverage of the upcoming UK inflation data release.

As a reminder, the Bank of England most recently forecasted a rise in Consumer Prices Index (CPI) inflation to 3.3%, though some economists believe that inflation will have been cooler at 3.0%.

We'll bring you the headline figure as it happens, as well as rolling reaction and analysis following the release.

UK inflation data release imminent

The May UK inflation data release is just minutes away. Will inflation have risen, and by how much if so?

BREAKING: UK inflation stays at 2.8% in May

UK inflation as measured by the Consumer Prices Index (CPI) stayed constant at 2.8% in the 12 months to May 2026.

Lower food prices lead to surprisingly flat UK inflation

UK CPI inflation, which was expected to have risen in the 12 months to May compared to the previous month, has instead stayed flat with lower food prices counteracting increased transport costs.

“After last month’s slowdown, inflation held steady in May as various price movements offset each other,” said Grant Fitzner, chief economist at the Office for National Statistics (ONS).

“The main upward movement came from transport with airfares, vehicle taxes and petrol prices all pushing up inflation,” Fitzner continued. “These were offset by lower food prices, with decreases in inflation seen across a range of meat, dairy and vegetable items compared to last month, as well as the cost of domestic heating oil, which fell back after climbing in recent month[s].”

UK inflation in detail

Let’s have a look at some of the other UK inflation figures beyond that headline 2.8% rate of annualised CPI inflation.

While annualised CPI inflation held steady in May, on a monthly basis the metric increased by 0.2% from April, the same rate as in May 2025.

The Consumer Prices Index including owner occupiers' housing costs (CPIH) rose by 3.0% in the 12 months to May 2026, unchanged from the 12 months to April.

CPIH also rose by 0.2% in May 2026 – the same monthly rate as in May 2025.

Core CPI (CPI excluding volatile goods like energy, food, alcohol and tobacco) rose by 2.6% in the 12 months to May 2026, up from 2.5% in the 12 months to April.

As had been predicted, CPI services inflation rose from an annual rate of 3.2% to 3.7% between April and May.

Could the Iran inflationary shock be short-lived?

When looked at in historical context, there is very little sign of a bump in inflation linked to the Iran war.

“UK inflation was flat during May, coming in below expectations despite higher energy prices continuing to weigh on UK households and businesses,” said Scott Gardner, investment strategist at J.P. Morgan Personal Investing. “This reading will provide some hope that any rebound in UK inflation could be short-lived after the announcement of a framework deal earlier in the week between the White House and Iran to stop fighting.”

Other experts are striking a more cautious tone, though.

“Despite energy prices having fallen recently, there is more inflationary pressure to come for the UK, when the Ofgem price cap moves higher next month,” said Luke Bartholomew, deputy chief economist at asset manager Aberdeen.

Rachel Reeves: Economic plan is controlling inflation

The chancellor of the exchequer Rachel Reeves has responded to today’s inflation figures.

“While the war in the Middle East pushes prices up globally, we have got the right economic plan and inflation has held steady,” said Reeves.

“We’re protecting families and businesses from rising costs, with cuts in energy bills and freezes in fuel duty and rail fares.”

Reeves’s statement drew attention to measures that the government has brought in including targeted support on heating oil, reduced tariffs and an extension of the fuel duty cut to December 2026.

Which categories had the biggest impact on UK inflation?

Different categories of goods and services had contrasting effects on UK inflation during May.

Transport had the largest upward impact on an annualised basis, rising 6.8% in the 12 months to May and contributing 0.29 percentage points to 12-month CPI inflation. On a monthly basis transport costs increased by 0.4% in May, having fallen 1.8% in April.

Conversely, the price of food and non-alcoholic beverages fell 0.1% during the month, which led to this category lowering annualised CPI inflation by 0.09 percentage points. While furniture and household goods prices increased 0.8% between April and May, they fell by 0.1% over the preceding 12 months, meaning this category reduced annualised CPI inflation by 0.04 percentage points.

Unchanged UK inflation suggests price pressures are ‘finely balanced’

The easing of food price pressures indicates that, beneath the headline impacts of higher energy prices, there is a longer-term disinflationary trend at play, according to Richard Flax, chief investment officer at wealth manager Moneyfarm.

“It was a modest positive surprise to see UK headline inflation hold at 2.8% in May, as consensus expectations had pointed to a move closer to 3%,” said Flax. “This suggests underlying price pressures remain more finely balanced than anticipated.”

Middle East disruption could still lead to higher UK inflation

Experts are warning UK consumers not to get carried away with the idea that the UK has escaped the inflationary risks resulting from the war in the Middle East, even following the peace deal negotiated between Iran and the US.

“Despite a peace deal being reached, disruption to global energy markets and related supply chains is yet to work its way through the system,” said Rob Morgan, chief investment analyst at wealth manager Charles Stanley. “Households still need to brace themselves for pricier shopping baskets and energy bills in the coming months.”

Despite this the reopening of the Strait of Hormuz “is undoubtedly good news for consumers, business owners and central banks alike”, Morgan added. “It means that the price jolt won’t be as ferocious as it might have been, and it could give way to a calmer inflationary setting next year… it’s far from a ‘worst case’ inflationary scenario for UK households and businesses.”

UK inflation outlook looks softer, says Deutsche Bank chief economist

Investment bank Deutsche Bank’s chief UK economist, Sanjay Raja, has highlighted the benign outlook for UK inflation implied by today’s release.

“Outside of services CPI, headline, core, and food prices [inflation] all undershot our expectations,” said Raja.

“Driving some of the downside in price momentum was a combination of weaker core goods prices and food prices. Indeed, despite rising energy costs, retailers remain hesitant to price in any cost pass-through.”

The easing of pricing pressures on these goods coincides with the apparent resolution to the conflict in the Middle East, which has already seen oil prices fall to around 10% below last month’s market assumptions.

“This will slowly flow through the inflation data over the summer and winter,” said Raja. “And, in even better news, the fall in oil prices has coincided with a fall in gas prices. It’s looking increasingly likely that the Ofgem Price Cap could be lower as opposed to higher come October 2026, bringing some much-needed relief for UK households and businesses.

“Altogether, the sting from the Iran conflict looks less than markets initially assumed,” Raja added. “The peak in CPI could end up well below what we saw last year.”

UK inflation recap

Here’s a recap of the main talking points from this morning’s UK inflation data release:

• CPI inflation was 2.8% in the 12 months to May, unchanged from the previous month.
• While transport costs rose, food prices fell month-to-month which contributed to the lower-than-expected figure.
• CPI services inflation rose to 3.7%, maintaining upward pressure on UK inflation more broadly.
• CPI rose by 0.2% on a monthly basis.

What does inflation mean for your money?

You’ll have already felt the impact of the May inflation figures the ONS has announced today when you bought travel tickets, food and drink or petrol last month. Inflation figures are backward-looking and reflect what people across the economy spend on everyday goods and services.

But beyond straining your monthly budget there are indirect consequences for your money when inflation runs above the 2% level that the Bank of England (BoE) targets.

First and foremost among these is the impact on interest rates. The BoE’s Monetary Policy Committee is meeting this week to decide on interest rates. Higher inflation incentivises central bankers to raise interest rates, which would increase the interest you pay on any debt (including your mortgage) but would also increase the amount of interest you could accrue on savings and cash.

Higher inflation also puts up any utility bills you have that are inflation-linked. Many contracts have a clause allowing them to increase by the rate of annual inflation (often this is based on the Retail Prices Index (RPI) rather than CPI).

State pensioners also potentially stand to benefit, as the triple lock means that state pension payments increase by whichever is highest out of CPI inflation, average wage growth or 2.5%.

Inflation reality checks

UK inflation undercut expectations in May and that’s a cause for optimism in many respects. Before we get carried away though, various experts have cautioned that the trouble may not be over yet.

“On the face of it, a flat 2.8% reading on headline UK inflation, against a 3% expectation, and almost all of which attributed to transport costs, is good news,” said George Lagarias, chief economist at financial consultancy Forvis Mazars. But despite this and the anticipated impact of a peace deal between the US and Iran, Lagarias warned that “businesses should not casually overlook the jump in services inflation from 3.2% a month ago to 3.7%.”

Sarah Coles, head of personal finance at investment platform AJ Bell, also highlighted that some categories such as motor fuel and pet ownership have seen significant inflation, while cumulative impacts of inflation can mount up over time.

While the US-Iran peace deal could mitigate inflation in future, “there are no guarantees that the deal will hold, and even if peace endures, price rises are already baked in through higher input costs”, said Coles.

Those on lower incomes are also disproportionately impacted by things like higher energy costs, as a greater proportion of their household income goes on energy-sensitive spending.

“The ONS Family Spending figures out last week showed that the 20% of households with the lowest disposable income spent 15.2% of their budget on food and drink – compared to 7.9% among the highest 20%. They also spent 7.8% on gas and electricity, compared to 3.9% among the richest fifth, and 2.5% on petrol, diesel and motor oils, compared to 2.1%,” said Coles.

What does the latest UK inflation data mean for interest rates?

The biggest question from here is what impact today’s inflation data might have on UK interest rates.

The Bank of England’s Monetary Policy Committee (MPC) is meeting this week, and tomorrow it will announce its latest interest rates decision.

We’re ending live inflation coverage here – but don’t worry, we’ve got a separate live report covering the MPC’s decision. Keep a close eye on that today and tomorrow as we bring you rolling news, insight and analysis of the announcement.

Summary

• UK inflation rose by 3.3% in the 12 months to March 2026, up from 3% in the year to February.
• Prior to the conflict in the Middle East, experts had predicted inflation to fall from 3% in February.
• Some forecasters expect CPI inflation could rise above 4% by the autumn.

| What is inflation? | UK inflation forecast | Inflation basket of goods | CPI release dates |

Good afternoon and welcome to MoneyWeek’s live coverage of the latest UK inflation data release.

Tomorrow morning, we’ll find out just how heavily the oil squeeze that followed the outbreak of the Iran conflict pushed up UK prices.

Follow us here today for rolling preview and analysis.

When is the March UK inflation data released?

The Office for National Statistics (ONS) will release the latest UK inflation figures – covering the month of March – tomorrow morning (22 April) at 7am.

Inflation statistics are always retrospective; they cover the month before the one in which they are released.

Last month, the inflation release for February showed that CPI inflation held steady at 3% over the preceding year. Significantly, this covered the period up until the outbreak of the conflict in Iran.

It is almost a given that inflation will have risen during March as a result of the war. The most important question is how significant the increase will prove to have been.

What is CPI inflation?

Inflation measures the pace at which prices increase. It is calculated by assessing changes in a core, representative basket of goods and services that economists deem representative of the UK economy as a whole.

The core measure of inflation – and the one we’ll be referring to here unless specified – is the annual change in the Consumer Prices Index (CPI). There are other measures of inflation which we’ll refer to, but CPI is the metric that is most closely followed, largely because it is the easiest metric with which to make international comparisons.

The Bank of England – like most central banks – targets a 2% annual CPI inflation rate. This is generally viewed as healthy by economists, representing an economy that is growing but without prices increasing too fast for household spending power to keep up.

What do analysts expect happened to UK inflation in March?

March is a key month in the recent history of UK inflation.

Up until February, inflation had been on a downward trend. There were some bumps in the road, but the expectations from most commentators and the Bank of England’s own forecasters was that inflation was trending down towards the 2% target – perhaps as soon as the second quarter of 2026.

The Iran conflict has drastically changed the picture. With the Strait of Hormuz effectively closed since the beginning of March, oil prices have risen, putting pressure on the input costs for almost every kind of business.

“March's CPI figures are expected to show inflation edging up, reflecting the impact of geopolitical tensions on oil and commodity prices, which feed through into energy, fuel and food costs for households,” said Harriet Guevara, chief savings officer at Nottingham Building Society.

Analysts at Bank of America and Deutsche Bank predict a 3.3% rate of annual CPI inflation.

Why does inflation matter to you?

Inflation impacts your money in two different ways – one of them direct, the other less so.

The direct impact is the amount that you pay for things. As far as the March data goes, you’ve already felt this impact; if you noticed goods (especially petrol) being a little more expensive over recent weeks, or your budget didn’t stretch as far as normal, that’s because of inflation.

But it has a less direct, and longer-lasting impact. Higher inflation is a warning sign for central bankers, and the only lever they can pull to bring it down is to increase interest rates.

Higher interest rates mean that mortgage rates increase, as do interest rates on any kind of debt you hold. On the other hand, it could see the interest that you earn on your cash savings increase.

How high could UK inflation go this year?

The oil shock following the Iran war will almost certainly have pushed the UK’s rate of CPI inflation up in the year to March. The bigger question in many respects is how high the metric could reach later this year.

Former Bank of England rate-setter Michael Saunders, now senior economic adviser at advisory firm Oxford Economics, thinks CPI inflation could reach as high as 4.5% by the end of the year – and that even if the oil crisis resolves, the impact could be long-lasting.

“Because of uncertainties regarding the extent to which higher inflation will affect inflation expectations and pay growth, the scale of any second-round effects is unlikely to be clear until early next year,” said Saunders.

See our UK inflation forecast explainer for more detail on where inflation is expected to go next.

Thanks for following our preview coverage of tomorrow's UK interest rates decision this afternoon. We're pausing live coverage for now, but join us from 7am tomorrow as we bring you live coverage of the inflation figures from their release.

Good morning and welcome back to our live coverage of the inflation data for March 2026. The Office for National Statistics (ONS) will release the figures very shortly.

UK inflation rises by 3.3%

The Consumer Prices Index (CPI) rose by 3.3% in the 12 months to March 2026 – up from 3% in the year to February. This data covers the first month since the conflict in the Middle East began on 28 February.

What drove the UK inflation rate rise?

On a monthly basis, CPI rose by 0.7% in March 2026 – up from 0.3% the year before.

The Consumer Prices Prices Index including owner occupiers’ housing costs (CPIH) rose by 3.4% in the 12 months to March 2026, up from 3.2% in the 12 months to February. On a monthly basis, CPIH rose by 0.6% in March 2026, compared with a rise of 0.3% in March 2025.

Motor fuels was the main driver of the monthly change in the annual CPIH and CPI rates, the ONS said. Falling prices in clothing partially offset the rise.

Rachel Reeves: “Our economic plan is the right one”

Chancellor Rachel Reeves has responded to the latest inflation data, insisting the government’s economic plan has put them in a stronger position to help families as the impact of the war in Iran affects the UK economy.

“This is not our war, but it is pushing up bills for families and businesses. That’s why it’s my number one priority to keep costs down,” she said.

"Our economic plan is the right one and has put us in a stronger position to support families in the face of this new crisis.

“We’ve taken £117 off energy bills, frozen rail fares and protected motorists with the fuel duty freeze. We’re acting to protect people from unfair price rises if they occur to bring down food prices at the till, and are boosting long-term energy security — building a stronger, more secure economy.”

Transport drives UK inflation in March 2026

Transport, principally motor fuels, made the largest contribution to the increase in CPI annual inflation in March.

Housing and household services prices also accelerated as did food and non-alcoholic beverages, and recreation and culture prices.

The increase in the inflation rate was partially offset by a fall in clothing and footwear prices.

How have petrol prices changed?

Fuel prices have shot up in recent weeks, after the US and Israel launched strikes on Iran on 28 February. Wholesale oil prices increased after Iran shut the Strait of Hormuz, a narrow waterway between Iran and Oman through which 20% of the world's oil is transported. As petrol and diesel are made by enriching crude oil, drivers saw prices at the pump surge.

The average price of a litre of petrol has now fallen back slightly to 157p, according to RAC fuel watch on 21 April, but it’s still 24.7p per litre more than before the Iran war began. On 14 April, it had risen to 25.5p more than before the conflict. The average price of a litre of diesel was 190p a litre on 21 April – 47.8p higher than before the conflict, but slightly less than the 49.2p difference on 14 April.

The price of a litre of petrol is now 24p more expensive than a year ago, according to analysis by roadside assistance provider, The AA. It means drivers are now paying £13.20 more to fill a typical 55-litre petrol tank compared to this time last year.

Signs of living costs rising

While drivers may have noticed the price of fuel rising when they visited the pumps since the war began, today’s inflation data shows how prices of goods and services have changed in March.

“These are the first flickers of the Middle East conflict heating up everyday costs, with volatile oil and gas market pricing hitting forecourts,” Susannah Streeter, chief investment strategist, Wealth Club said.

“There’s likely to be further flare-ups on the way, especially if a longer-term resolution isn’t agreed.”

The renewed climb in fuel prices puts households at risk of squeezed budgets, Streeter said.

“Shoppers have turned cautious, and it seems retailers have had to discount to shift stock, with prices for clothing and footwear declining sharply month on month. They dipped by 0.8% in the 12 months to March 2026 compared with a rise of 0.9% in the 12 months to February.

“It was the lowest recorded annual rate for March since 2021 when prices were hit by the COVID-19 pandemic. Clearly consumers are tightening their belts as another cost-of-living crisis arrives.”

How do you feel about the cost of living?

Inflation affects people in different ways – as people have different spending habits, your personal inflation rate can differ to the national inflation rate.

For instance, motorists who need to regularly fill up their car with fuel will notice their transport spending increasing more than people who tend to walk everywhere.

How are you feeling about the rising cost of living?

What does the UK inflation rate rise mean for savers?

The average savings rate is currently 3.46%, according to money comparison website Moneyfactscompare.co.uk. This is higher than the latest inflation rate of 3.3%, meaning savers can get real returns on their cash – but it’s important to shop around.

The best easy access savings account on the market right now pays 4.50%. This is the Chase Saver with boosted rate – it includes a 2.25% AER bonus rate that's fixed for 12 months. The underlying variable rate is 2.25%.

There are currently 1,582 inflation-beating savings accounts, including 139 easy access, 131 notice accounts, 138 variable rate ISAs, 387 fixed rate ISAs and 787 fixed rate bonds.

Caitlyn Eastell, personal finance analyst at Moneyfactscompare.co.uk, said: “During times of uncertainty, some savers may place higher value on flexibility. Easy access accounts can be useful to help manage monthly volatility, giving savers the freedom to respond to unexpected costs."

Savers face a "tricky balancing act" when choosing between a fixed or variable rate account, Eastell said. "While they may be able to enjoy more competitive returns in the short-term, inflation will quickly catch up, eroding their hard-earned cash. In any case it’s crucial savers shop around for deals that pay over 3.3% to ensure they aren’t left out of pocket.”

Is the UK heading for stagflation?

The latest UK inflation figures are a worry for policymakers given that they arrive alongside a weakening economic picture.

The International Monetary Fund (IMF) downgraded its forecast for UK economic growth last week, saying that the country would be hit harder by the fallout of the Middle East conflict than any of the other members of the G7 (a group of seven rich nations of which the UK is a member).

This combination of inflation and economic stagnation is often referred to as ‘stagflation’, and poses a major headache for rate-setters. Usually, the Bank of England would hike rates to combat higher inflation – but that risks exacerbating the weakening economic situation.

On the plus side, economic weakness could in itself prevent inflation getting too out of hand.

“Though rising services inflation will worry rate-setters as it suggests that the fallout from the Iran war is already intensifying underlying price pressures, the squeeze from a weakening economy should limit any second-round effects,” said Suren Thiru, chief economist at the Institute of Chartered Accountants in England and Wales.

However, Thiru added that despite the extended ceasefire that has been announced, energy costs and food prices are likely to continue to rise and could lift UK inflation above 4% by the autumn.

Higher UK inflation could push mortgage rates higher

Despite the weakening economic situation in the UK, the Bank of England may veer towards hiking interest rates anyway if it deems the risks from runaway inflation to be too great.

“That would likely mean higher mortgage rates, adding to the cost pressures facing those looking for a home loan and putting further strain on borrowers coming to the end of cheaper fixed-rate mortgages,” said Charlotte Kennedy, Chartered Financial Planner at wealth manager Rathbones.

According to data from Moneyfacts, the UK’s average mortgage rate has risen from 5.50% to 5.71% since the previous inflation announcement.

“Homebuyers will need to evaluate their affordability because rates could stay higher for longer as the Bank of England tries to bring inflation back towards its target,” said Caitlyn Eastell, personal finance analyst at Moneyfacts.

How could higher UK inflation impact your investments?

While higher UK inflation is likely to lead to increased mortgage and savings rates, it is less straightforward to say how it could impact your investments – largely because different investments will respond differently to higher inflation.

Gilt yields are likely to rise, assuming that the Bank of England delays or reverses its cutting cycle in response to higher inflation, and this would likely feed through into higher bond yields.

But equities are a mixed bag. “UK equities, particularly consumer-facing sectors, face margin pressure from rising input costs,” said Lale Akoner, global market analyst at trading platform eToro.

“Conversely, energy and commodity-linked stocks should benefit from sustained oil strength,” Akoner added.

How will the Bank of England respond to higher inflation?

The Bank of England’s Monetary Policy Committee (MPC) faces a difficult decision when it next sets UK interest rates.

Given the twin challenges of a weakening economy (which would normally imply rate cuts) and rising inflation (which would normally imply rate hikes), it is far from clear what the MPC will decide.

“After the shocks of Covid and the Ukraine war, central bankers remain hypersensitive to anything that risks embedding another round of inflation,” said Rob Morgan, chief investment analyst at investment manager Charles Stanley Direct.

The next MPC meeting takes place next week, and its decision will be announced on 30 April.

“The BoE is expected to put interest rates cuts on the backburner once more,” said Morgan. “The MPC needs time to assess the impact and will no doubt resist jumping to any conclusions about how long the conflict lasts and the extent of any pass through to core inflation.”

Services inflation remains sticky

Most experts had expected an increase in goods inflation, which is a logical consequence of the Iran war pushing up oil prices.

Alarmingly, though, this was accompanied by a rise in services inflation from 4.3% in the 12 months to February to 4.5% in the 12 months to March.

Services inflation has been running persistently ahead of goods inflation since July 2023. This sticky services inflation has been a major upward driver of overall UK inflation throughout that time.

This was largely due to increased air fares, and according to Deutsche Bank’s chief UK economist Sanjay Raja the bank’s core services measures, which factor out some more volatile inputs, “remained broadly unchanged”.

Still, persistent services inflation compounds the headache faced by MPC rate-setters next week.

UK inflation: other metrics

So far today we’ve mostly discussed the headline consumer prices index CPI figure, which rose 3.3% in the year to March.

Some of the other key metrics from today’s release are:

• Consumer Prices Index including owner occupiers' housing costs (CPIH) rose by 3.4% in the 12 months to March 2026, up from 3.2% in the 12 months to February;
• Core CPIH (CPIH excluding energy, food, alcohol and tobacco) rose by 3.3% in the 12 months to March 2026, down from 3.4% in the 12 months to February;
• Core CPI (CPI excluding energy, food, alcohol and tobacco) rose by 3.1% in the 12 months to March 2026, down from 3.2% in the 12 months to February;
• On a monthly basis, CPI rose by 0.7% in March 2026, compared with a rise of 0.3% in March 2025;
• CPIH rose by 0.6% in the month to March 2026 (up from 0.3% in the month to March 2025), while core CPIH rose by 0.3% over the same period (down from 0.4% a year before).

Recap: UK inflation rose to 3.3% in year to March

Here’s a recap of this morning’s UK inflation headlines:

• CPI inflation rose to 3.3% in the 12 months to March;
• This was largely driven by increases in transportation costs, especially motor fuels – largely thanks to the impact of the war in the Middle East;
• Services inflation has remained sticky, rising from 4.3% in the 12 months to February to 4.5% in the 12 months to March;
• Higher inflation could prompt the Bank of England to slow its pace of rate cuts, or even raise interest rates – potentially leading to higher mortgage rates.

Thank you for following our coverage of today’s UK inflation data release. As expected, the Iran war has pushed up prices across the UK – how will policymakers react? We’ll find out at the next MPC meeting, which is taking place next week.

We’re ending today’s live coverage here, but keep an eye on the MoneyWeek website and subscribe for email updates as we bring you more inflation news and reaction following today’s release.

What is stagflation?

Stagflation is when an economy is marked by both stagnant growth and high inflation. That often means rising unemployment. In normal times, macroeconomists generally think in terms of a broad trade-off between inflation and unemployment. In recessions, with tepid demand and high levels of unused capacity, inflation tends to be low. In booms, it's the other way round: strong demand tends to push up prices.

This is the inverse growth/inflation relationship of the classic Phillips curve, one of the most fundamental concepts in macroeconomics. Stagflation breaks that logic (and indeed undermined the credibility of the Phillips curve in the 1970s). It's a highly unusual and undesirable state of affairs that leaves policymakers with no easy solutions and makes investors confused and fearful.

What happened in the 1970s?

The Arab oil embargo of 1973-1974 following the Yom Kippur war – and later, the disruption following the Iranian revolution in 1979 – sent crude oil prices sharply higher. Demand for oil is inelastic – that is, people still need to buy it even when supplies are cut and the price rises.

And because energy is such a universal input – embedded in all aspects of economic life including transport, manufacturing and food production – those 1970s oil shocks rippled through entire economies. Costs rose, output fell and inflation surged even as unemployment climbed.

The result was a sustained period of economic malaise that conventional economics struggled to explain and policymakers to cope with. In the US, real GDP shrank for two years in a row and inflation surged to above 10%.

Why is stagflation so hard to deal with?

In such circumstances, central banks and politicians are stuck in a double-bind. If they put up interest rates to bring prices under control, they risk further slowing the economy and destroying jobs in the short run. Conversely, a policy of trying to squash unemployment and boost the economy, for example through public spending or very low interest rates, risks generating inflation and even a wage-price spiral.

In the 1970s, some central banks – notably the Bundesbank in (West) Germany – stopped inflation becoming entrenched by stepping on the brakes early and committing firmly to stable prices.

In the US, by contrast, the Federal Reserve was slower to recognise the scale of the threat, fearing the political and economic consequences of unemployment. Inflation – and, crucially, expectations of higher future inflation – became entrenched. The cost of breaking that cycle, under the leadership of Fed chairman Paul Volcker, was extreme tightening and an even more painful and prolonged recession.

Are we heading for stagflation?

It's entirely possible. “Coming on top of the ongoing Ukraine and tariff wars, the Iran war is shaping up as the biggest stagflationary shock the world has seen in five decades,” reckons Kenneth Rogoff, the former chief economist of the IMF. In the short-term, most analysts' estimates put the likely blow to the global economy at less than one percentage point and the lift to inflation in the same area. Mark Dowding of RBC BlueBay Asset Management calculates the war could take half a percentage point off global growth and add a percentage point to inflation – but that's based on current projections for the conflict: “There are scenarios which could be much worse than this”, he tells the FT.

Any reasons for optimism?

Yes. Compared with the 1970s, advanced economies are less energy-intensive, central banks are more alert to the risks of unanchored inflation and more flexible labour markets are less prone to a wage-price spiral. These factors should make it harder for a temporary shock to become entrenched, says Noah Smith on Substack. Arange of academic studies add credence to that view. Yet in truth, it is early days in assessing the likely damage from the Iran war. The oil shortage is only now about to manifest itself. As that begins to bite, things could get much worse.

Does that mean stagflation is more likely?

Recession and stagflation, yes. And even if the war ends unexpectedly quickly, a lot The future for Britain might look disturbingly like the 1970s of damage is already baked in. Even if the conflict ended now, the Strait of Hormuz would remain largely impassable for many weeks, say analysts at Oxford Economics, given the time needed to restart shuttered facilities, resecure supply chains, and the continuing fear of attacks on shipping. For Europe – and in particular the UK – the risks are acute. The continent remains heavily dependent on imported energy and its growth outlook was already fragile before the war. Britain relies significantly on imported gas and our economy has long struggled with low productivity growth and sensitivity to external shocks (Covid, Ukraine). Having only recently emerged from a period of double-digit inflation, the UK faces renewed price pressures just as growth is faltering. It's an ominous mix.

What should investors do?

Broadly, stagflationary environments tend to favour real assets over financial ones. So commodities, especially those involved in producing energy, often benefit directly from the underlying shock, and gold has historically performed well as a hedge. Stagflation is, on average, the worst kind of environment for stocks. Global stocks are already down around 9% from their late February peak (MSCI World index). But don't panic, says Duncan Lamont of Schroders. “Our analysis shows that stocks often perform well when there is stagflation, just not as well as at other times.” Based on data since 1926, the median yearly real return in a stagflation year has been about 0%. Not ideal, but “getting close to inflation in a high-inflation environment is not a bad outcome”. Defensive sectors such as utilities and consumer staples perform relatively well, as demand is less sensitive to the economic cycle. Energy and materials companies have typically done well, too.

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UK inflation: Summary

• The Office for National Statistics (ONS) has released the latest UK Consumer Price Index (CPI) measure of inflation data.
• It has remained at 3%, unchanged from January.
• Economists expected the February inflation data to remain at 3%.
• The data has been released as fears grow that inflation will surge in the coming months due to the conflict in Iran.
• The Bank of England (BoE) held interest rates at 3.75% at its last meeting in response to the growing threat of rising prices.
• UK inflation forecast | Interest rate predictions | Next Bank of England base rate meeting | New ONS basket of goods

Good afternoon and welcome to our live coverage ahead of the latest UK inflation data being published by the Office for National Statistics (ONS) tomorrow (25 March).

The latest Consumer Price Index (CPI) measure of inflation data will be released at 7am, covering the 12 months to February 2026.

In the 12 months to January, CPI inflation read 3%, down from 3.4% in December, marking the slowest annual rate of CPI inflation since March 2025.

Inflation for February is expected to come in around the 3% mark, according to economists.

Follow our live report here as we bring you rolling preview analysis ahead of the data being published, plus live reaction after it is released.

Economists expect inflation to have risen at same pace as January

Economists at research and consulting firm Pantheon Macroeconomics expect the February data to show inflation rising at 3% in the year to February, unchanged from January.

The firm is forecasting higher core goods inflation will offset lower motor fuel costs, with core CPI inflation set to remain unchanged year-on-year at 3.1%.

Meanwhile, it is forecasting services inflation to come in at 4.1%, down from 4.4% in January.

UK inflation since 2020

The CPI measure of inflation has broadly trended downwards since peaking at 11.1% in October 2022 following a surge in wholesale energy prices.

Global prices for gas, electricity and oil started to increase in the summer of 2021 when economies around the world opened up following coronavirus lockdowns. This increase was exacerbated by Russia’s invasion of Ukraine.

In September 2024, the CPI measure of inflation slowed to 1.7% before increasing to 3.8% in July 2025, but since then has slowed to 3% in January 2026.

Why does the ONS release inflation figures at 7am?

The ONS previously released key macroeconomic data at 9.30am and briefed some news agencies on the details beforehand.

However, it trialled a 7am release time during the coronavirus pandemic, a move it made permanent in March 2022.

The statistics body said it had decided to change the time indefinitely as it “increases the visibility and timely explanation of our statistics via the media” and made it more widely accessible to the public.

'The bigger concern is what happens next'

While the headline CPI inflation figure published by the ONS tomorrow is expected to remain roughly stable, a shock could be on the way due to the conflict in the Middle East.

The price of Brent crude oil has surged since the US and Israel first launched strikes on Iran on 28 February, disrupting shipping and leaving energy infrastructure damaged. A barrel of crude oil has gone from $72 on 28 February to $95 on 23 March.

Rising oil prices push up the price of petrol, transport costs and then consequently the cost of the weekly food shop.

Tamsin Powell, consumer finance expert at personal loan lender Creditspring, said: “The bigger concern is what happens next, as rising fuel and wholesale energy costs are already pointing to renewed pressure in the months ahead.

“Even if February’s CPI figure looks calm on paper, it may not reflect the pressures already building in everyday spending,” Powell added.

What do you think inflation will be in February?

Why rising inflation doesn’t always mean prices are going up for you

The ONS’ official measure for tracking inflation is the CPI, but even if it’s rising that doesn’t mean your cost of living has gone up.

The CPI measure tracks price rises across a virtual basket of roughly 750 goods and services, which changes once per year to keep up with market trends.

But that means the headline figure change might not reflect how much more you’re spending on a day-to-day basis.

For example, a teenager might be more impacted by price rises in video games than a pensioner.

We're going to end our coverage here for today, but keep an eye on this page where we'll bring you live reaction and analysis when the ONS releases its latest inflation data tomorrow.

Good morning and welcome back to our live coverage. The ONS is just about to release its latest inflation data, so stay with us for rolling reaction and analysis.

BREAKING - UK INFLATION REMAINED AT 3% IN FEBRUARY

Data from ONS today unsurprising

The data released by the ONS this morning is what was expected from economists.

The annual rate of CPI inflation has stayed the same as January, but it doesn’t reveal much about where prices, which are likely to be impacted by the war in the Middle East, might go in the future.

Rising clothing prices offset by slowing petrol costs

The ONS said rising clothing and footwear prices saw the headline CPI figure rise in the 12 months to February, but falling petrol prices offset the increase.

Prices also rose across furniture and household goods, but slowed across food and non-alcoholic drinks.

Grant Fitzner, chief economist at the ONS, said prices for petrol costs were collected before the conflict in the Middle East broke out, meaning they are likely to rise over the coming months.

Core CPI rises while services inflation falls

Core CPI, which strips out prices for more volatile items like food and energy, rose by 3.2% in the 12 months to February, up from 3.1% in January.

Meanwhile, the CPI services annual rate eased from 4.4% to 4.3%.

The Consumer Price Index including owner occupiers’ housing costs (CPIH), which includes council tax costs and is considered the most comprehensive measure of inflation, rose by 3.2% in February, unchanged from the 12 months to January.

February inflation figures a ‘false flag’ for the economy

While the February inflation figures released today might seem positive, they’re still over the Bank of England’s 2% target, which is set by the government.

Meanwhile, they measure price rises which happened before the conflict in the Middle East, which economists expect will have a significant inflationary impact over the coming months.

Sirun Thiru, chief economist at the Institute of Chartered Accountants in England and Wales (ICAEW), branded the February inflation figures a “false flag”.

Thiru added: “While inflation should fall next month (March) as the cut to green levies temporarily lowers energy bills, a brutal inflation surge looms with skyrocketing oil and gas costs likely to lift the headline rate above 4% by the summer.”

What does the latest data mean for interest rates?

Today's inflation data is unlikely to have much impact on interest rates in the near or long term.

The Bank of England’s Monetary Policy Committee (MPC) had been intending to lower interest rates in 2026 with inflation slowing, unemployment rising and the economy stagnating.

At the start of the year, the central bank was expected to lower rates twice in 2026, with the first coming in March.

But the conflict in the Middle East and its potential inflationary impact has, at least for now, given the MPC more pause for concern.

At its last meeting, ratesetters voted unanimously to hold interest rates at 3.75% rather than lowering them.

Andrew Bailey, the governor of the Bank of England, said holding interest rates was the “appropriate” thing to do with the threat of higher inflation looming and the knock-on effect this could have on consumers.

In the longer term, interest rates could remain at their current rates until well into 2027, according to advisory firm Oxford Economics, which has voiced concerns over elevated global oil and gas prices.

Inflation figures include supermarket scanner data for first time

This month’s set of inflation data is the first which includes prices tracked through supermarket scanners.

The ONS typically tracks prices by manually checking them in stores and shops, but now around 50% of the grocery market data is being tracked through scanners and online tills.

The ONS says the move will allow it to more accurately measure year-on-year price changes and find out how much of a particular item shoppers are buying.

A closer look at the figures

How inflation affects you depends on what goods and services you buy, so it helps to look at the data in a more granular way.

Here’s a breakdown of exactly how much prices rose across some of the main categories in the year to February.

A quick recap

If you’re just joining us, here’s a quick recap of what you’ve missed.

The CPI measure of inflation remained at 3% in the year to February, the ONS confirmed this morning, in line with economists’ expectations.

The CPIH measure of inflation also stayed the same as the month before, remaining at 3.2% in the year to February.

But experts are warning the data pre-dates the war in the Middle East, which is expected to put major upward pressure on inflation.

Savers should be ‘hunting down’ the best rates

Higher inflation can keep savings rates elevated, but it’s crucial your money is an account that’s paying out a rate above inflation.

The average savings rate on the market is currently paying 3.37% in interest, according to data website Moneyfactscompare, but if inflation rose to 4%, you would be losing money in real terms.

Caitlyn Eastell, personal finance analyst at Moneyfactscompare, said: “Settling for average won’t cut it, savers should be hunting down the most competitive rates. The top easy access account currently pays 4.71%, which puts savers ahead.”

Economists at Pantheon Macroeconomics believe inflation will peak at 3.6% in November 2026, but what do you think?

How does the UK’s rate of CPI inflation compare to other countries?

CPI data is the measure used to compare the UK's rate of inflation against other major countries.

According to the ONS, the UK’s rate of inflation was higher than the EU (2.1%), Germany (2%) and France (1.1%) in February.

The last time the UK rate was lower than the EU’s was December 2024.

When will March's inflation data be published?

The ONS publishes inflation data once per month.

It will be releasing the data for the month of March on 22 April.

That concludes our inflation coverage for today. Thank you for joining us. We will be back with more live analysis in the weeks to come.

High inflation is surprisingly hard to forecast. It's tempting to assume that the results of a major event – such as the current Middle East crisis – should be easy to predict. Yet while this must push up energy prices in the short term, it is not so simple to say whether it will drive sustained broader inflation. There are far too many factors involved, and it is often impossible to anticipate which ones will prove most important.

Consider that during the 2010s, many people – including most of MoneyWeek – expected that extreme monetary policy – including interest rates at zero and vast amounts of quantitative easing (QE) – must lead to a rapid resurgence in inflation. This very clearly did not happen.

Why? Maybe this inflationary force was offset by disinflationary forces such as globalisation (cheap imports from China), productivity gains through technology and falling energy prices from the US shale revolution. Maybe the overhang from the financial crisis and the eurozone crisis, combined with government spending curbs, kept the economy below capacity. Maybe consumers and businesses hoarding cash or a reluctance by banks to lend meant the huge increase in the monetary base did not result in a similar increase in broad money (ie, what's circulating in the economy).

That's already no shortage of explanations – and there are others, but this space is short. Which you prefer may depend on your taste in economics; none seem definitive.

Will the energy crisis lead to high inflation?

Jump ahead to the pandemic and the result was different. Central banks eased aggressively once more, but this time inflation soared within two years. Why? The energy price shock from Russia's invasion of Ukraine. The lagged effects of supply-chain disruption from the pandemic. Pent-up consumer demand and changing spending habits. A tight labour market pushing up wages. High levels of government spending, including money that went directly to individuals and businesses. Again, take your choice.

So we can't be too certain how this new shock will play out. Higher energy prices feel inflationary, but if they weaken the economy, the effect may be temporary. Central banks are less likely to sit on their hands this time, though you can debate whether tightening policy in the face of a supply shock is a sensible thing to do – maybe it just doubles the harm.

Set against that, the AI boom is hugely energy intensive, which may amplify the effects – unless, of course, the jitters in private credit start to squeeze the funding it needs for growth. But perhaps the key factor is that it now seems politically impossible for government spending to fall (the US has a 6% budget deficit in a booming economy) and this will surely be funded by central banks through QE if markets baulk. So my guess is that this energy crisis will be another upward shock for a world that already has an underlying bias. That doesn't mean double-digit inflation – but we are not getting back to central banks' 2% target soon.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

UK inflation fell in the year to January 2026, according to data released this morning (18 February) by the Office for National Statistics (ONS), following an uptick in December 2025.

The headline rate of Consumer Prices Index (CPI) inflation rose by 3.0% in the 12 months to January, down from 3.4% in the month-before period. This was slightly above predictions from Bank of England staff, which had forecast a CPI increase of 2.9%.

While it rose in December, the UK’s inflation rate is trending downwards over time. January’s 3.0% figure marks the slowest annual rate of CPI inflation since March 2025.

While it expects CPI to grow at around 3% during the first quarter of 2026, Bank of England forecasts currently predict that inflation will fall to 2.1% in April, largely thanks to disinflationary measures included in last year’s Autumn Budget.

The drop in UK inflation in January is expected to support an interest rates cut at the next meeting of the Bank of England’s Monetary Policy Committee (MPC).

“Granted services inflation was a tad stronger than expected, and this does play an important role in the Bank’s thinking,” said Luke Bartholomew, deputy chief economist at asset manager Aberdeen. “But with the labour market data yesterday pointing to ongoing weakness in employment and a further softening in pay growth, most policymakers are likely to look through any short run stickiness in the services data.”

On a monthly basis, CPI fell by 0.5% between December and January.

What pushed UK inflation lower in January?

The biggest disinflationary effects in the year to January came from transport, food and non-alcoholic beverages, and housing and household services.

“Inflation fell markedly in January to its lowest annual rate since March last year, driven partly by a decrease in petrol prices,” said Grant Fitzner, chief economist at ONS.

“Airfares were another downward driver this month with prices dropping back following the increase in December,” Fitzner continued, adding that lower food prices also supported the slowdown in UK inflation over the period.

On the other side of the ledger, health costs and restaurants and hotels were the biggest upward drivers of UK price increases over the period, both contributing 0.03 percentage points to CPI inflation.

What is inflation?

Inflation is an economic metric that measures the rate at which prices are rising within an economy. It is one of the key metrics observed by policymakers, including politicians and, crucially, central bank interest rate-setters, in order to make decisions relating to the economy.

There are various ways of measuring inflation, but the key one is CPI. This is the inflation metric that most economists and policymakers regard as the headline measure of inflation in the UK and worldwide.

Most economists view 2% as the optimal CPI rate for a healthy economy. It implies that prices are rising (which indicates economic growth), but slowly enough not to become unmanageable for business and household budgets.

How does UK inflation impact your money?

Inflation impacts your money both directly and indirectly.

Directly, the rate of inflation reflects the pace at which the price you pay for goods and services increases. Assuming your income doesn’t change, higher rates of inflation will mean you have less purchasing power; your monthly budget may not stretch as far or you may not have as much disposable income left once you’ve paid for your essentials.

Indirectly, it impacts various aspects of the economy that are in turn reflected in your finances. This could include increases in the bills you pay (many utilities, for example, increase annually in line with retail prices index (RPI) inflation) or pay rises from your employer, but most importantly, inflation feeds into interest rates.

Central banks, such as the Bank of England, raise or lower interest rates in order to balance controlled inflation against healthy economic growth. When inflation is running high or expected to rise, policymakers (specifically the MPC) raise interest rates in order to discourage inflation. When economic growth is weak, they lower them in order to stimulate growth.

Interest rates in turn feed into various key components of your personal finances. For example, higher rates mean you’ll likely pay more interest on your mortgage. But at the same time, they also mean you should earn more interest on your savings or cash ISA.

So a drop in UK inflation now could have implications for your finances next time the MPC meets to set interest rates.

UK inflation: summary

• The Office for National Statistics (ONS) has released the latest UK inflation data today (21 January).
• The data shows the Consumer Price Index (CPI) measure of inflation rose by 3.4% in the 12 months to December
• Analysts expected CPI to have risen by this amount; the Bank of England’s latest forecast projected a 3.5% increase.
• In the 12 months to November, CPI rose by 3.2%, below analyst predictions that had been as high as 3.6%.
• The Bank of England projects that CPI will fall to 3.0% in January, and to 2.5% by the fourth quarter of 2026.

| What is inflation? | Upcoming CPI release dates | Your personal inflation rate |

Good afternoon, and welcome to our coverage of the latest UK inflation data.

The Office for National Statistics (ONS) announces the latest Consumer Prices Index (CPI) inflation data, covering the year to December 2025, tomorrow morning.

The previous release, covering November, showed a surprise drop in year-on-year inflation to 3.2%; the Bank of England had forecast a reading of 3.4% while some analysts had forecast as high as 3.6%.

But December’s read could paint a gloomier picture. The Bank of England’s latest available projections (dated 5 November) expect CPI to have risen to 3.5% in the 12 months to December, and other analysts also expect UK inflation to have risen from the previous month.

Follow us here at MoneyWeek for rolling preview analysis ahead of tomorrow’s announcement, plus live coverage of the release and reaction tomorrow morning.

Economists expect UK inflation to have risen in December

The latest Bank of England forecasts point to a jump to 3.5% in CPI inflation tomorrow.

These forecasts are a little dated – they were included in the Monetary Policy Report that accompanied the MPC’s last-but-one meeting, on 5 November. There have been two inflation data releases (covering October and November) since then, and both reads undershot expectations.

But economists still broadly forecast UK inflation to be higher in the year to December than it was in the year to November.

There is some uncertainty over the date on which inflation data will have been gathered; 9 December would be four weeks after the previous data collection, but it is unusually early in the month.

The alternative, 16 December, is a more appropriate date but would make it the fifth five-week gap between collections of 2025, and it is unusual to have that many five-week gaps in a calendar year.

The collection date could materially change the outcome, as prices tend to increase in the run-in to Christmas.

Robert Wood, chief UK economist at Pantheon Macroeconomics, forecasts CPI to have risen 3.3% assuming that data is collected on 9 December, rising to 3.4% if it is collected on 16 December.

Sanjay Raja, chief UK economist at Deutsche Bank, expects a headline CPI inflation figure of 3.4%, though he said this could be higher if (as he expects) data is collected on the later date.

When is UK inflation data announced?

UK inflation data for the 12 months to December will be announced at 7am on 21 January.

We will bring you live analysis and reaction to the ONS data tomorrow morning following the release.

UK inflation's recent history

It has been a turbulent few years for UK inflation.

Following the Covid pandemic, inflation was running at historically low levels – just 0.2% in August 2020. Most economists would argue that inflation rates this low are economically unhealthy; 2% is regarded as the optimal rate, which is why the Bank of England targets this level.

From the second half of 2021, though, the rate of inflation rapidly passed beyond this optimal rate, peaking at 11.1% in October 2022.

Since then, inflation has gradually been trending downwards. The 2024 Autumn Budget caused a temporary bump as inflationary measures like increased employer National Insurance contributions came into effect from April, but following a three-month plateau at 3.8% over the summer, inflation now appears to be coming down.

What is CPI inflation?

You might be asking yourself, what is inflation?

Inflation is a measure of the pace at which prices are increasing within an economy. A higher rate of inflation means that prices rose faster, while a slower rate means they fell slower.

A fall in inflation doesn’t indicate a fall in prices, unless the inflation number turns negative (which is known as deflation). But a fall in inflation from, say, 3% to 2% means that prices still rose, just at a slower rate than in the previous period.

There are various different ways to measure inflation. The Consumer Prices Index (CPI) is viewed as the key metric by economists, but there are others including Consumer Prices Index including owner occupiers’ housing costs (CPIH), which includes the costs of owning, maintaining and living in a home, and the Retail Prices Index which includes costs associated with home ownership.

The longer-term UK inflation outlook

UK inflation looks set to come in somewhere above 3% in the December release.

But what is the longer-term outlook for UK inflation, and when is it likely to return to the 2% level that economists target?

Analysts at the Bank of England expect UK inflation to fall to 3.1% in the first quarter of this year, and to fall below 3% in the second quarter. Inflation is expected to average 2.5% in the final quarter of the year.

In Q1 of 2027, the bank forecasts that inflation will have fallen to close to its target rate of 2%, and that it will fall below it the following quarter.

What does inflation mean for your money?

Inflation erodes the purchasing power of money.

It is related to interest rates, in that policymakers will generally raise rates when inflation is high (in order to reduce the amount of available money within the economy, which lowers demand and thus prices) and reduce them when inflation is low (in order to stimulate more economic activity).

But the relationship isn’t perfect, and other factors – particularly the overall health of the economy – impact interest rates. The UK is currently enduring a period of elevated inflation alongside lacklustre growth, meaning that interest rates are falling despite inflation running well above the 2% target rate.

That is bad news for savers in particular, because the returns on saved cash may not beat inflation, meaning that savings held for the long term are actually losing value in real terms.

“Falling inflation puts the spotlight firmly on getting the best possible return,” said Harriet Guevara, chief savings officer at Nottingham Building Society. “As expectations grow that interest rates will start to come down, savings rates are likely to follow. That makes now an important moment to shop around, while competition between providers is still delivering strong returns.”

The impact of inflation on long-term cash holdings is also a reason to consider starting to invest some of your disposable income.

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Thank you for following our preview of the latest UK inflation data release today. We're going to pause coverage here for this evening, but join us first thing tomorrow morning as we report on the latest UK inflation figures live from 7am.

Good morning and welcome back to our live UK inflation blog.

The Office for National Statistics (ONS) will be announcing December's figures shortly.

Stay with us for live coverage, rolling reaction and analysis.

BREAKING: UK INFLATION ROSE TO 3.4% IN DECEMBER

The UK’s Consumer Price Index (CPI) rate of inflation rose in the 12 months to December in part due to higher tobacco prices, the ONS said.

A rise in the cost of airfares, likely due to higher prices over the Christmas period, also drove the slight uptick on the month before.

The ONS said rises in the price of tobacco and transport were partially cancelled out by falls in the cost of furniture and household goods and recreation and culture activities such as TV subscriptions and trips to the cinema.

Prices across the health and communication sectors also fell.

The Consumer Price Index (CPI) rate of inflation is not the only measure tracked by the ONS.

It also releases Consumer Price Index including owner occupiers' housing costs (CPIH) data which includes the costs of owning, maintaining and living in a home.

It is considered the most comprehensive measure of inflation published by the ONS.

The ONS has published the CPIH measure of inflation for the 12 month to December today (21 January), which shows a rise of 3.6%, up from 3.5% in November.

December uptick 'short-lived'

The latest CPI inflation data is a blow for the Bank of England (BoE) which has a 2% target it is supposed to meet.

However, Alice Haine, personal finance analyst at investment platform Bestinvest by Evelyn Partners, said the December figures were just an uptick and inflation would come down in early 2026.

Haine said: "The combination of tax rises and spending restraints introduced in the Autumn Budget, along with a cooling labour market and slowing wage growth, are likely to act as a drag on prices."

Haine also pointed to core inflation, which strips out more volatile items such as food, alcohol and tobacco, holding at 3.2% in December.

Core inflation is considered important because it provides a clearer picture of long-term price rises.

How has inflation changed over time?

Both the CPI and CPIH measures of inflation, while rising slightly in December, have broadly fallen from peaks of 11.1% and 9.6%, respectively, in October 2022.

The CPI rate of 11.1% in October 2022, driven in part by soaring energy prices, was the highest the measure had been for four decades.

What does the latest inflation data mean for interest rates?

The Bank of England most recently cut interest rates from 4% to 3.75% in December as it looks to kickstart growth in the UK economy.

However, rising inflation could cause the bank's Monetary Policy Committee (MPC), which sets rates, to take a more cautionary approach at its next meeting in February.

Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales (ICAEW), said the December inflation figures made a February rate cut "look improbable", "particularly as policymakers may want to assess the effect of escalating geopolitical tensions before loosening policy again".

A closer look at the figures

The main drivers of the uptick in inflation in the 12 months to December were alcohol and tobacco, transport and food and non-alcoholic drinks.

Here's a breakdown of exactly how much prices rose across these categories.

Alcohol and tobacco

Alcohol and tobacco prices rose by 5.2% in the 12 months to December. This was a sharp increase from 4% in the 12 months to November.

The ONS said the uplift was mostly caused by a rise to Tobacco duty in November.

Transport

Prices across the transport sector went up by 4% in December, a rise from 3.7% in November.

The spike was mainly caused by an increase in air fares, which rose by 28.6%.

Food and non-alcoholic drinks

Food and non-alcoholic beverages prices rose by 4.5% in the 12 months to December, up from 4.2% in the 12 months to November.

Chancellor reacts to the latest inflation figures

The chancellor Rachel Reeves has responded to this morning’s inflation data, saying that driving down people's bills and everyday costs is her "number one focus".

"At the Budget I announced £150 off energy bills, a freeze to rail fares for the first time in 30 years, a freeze to prescription charges for the second year running, and an increase to the national minimum and living wage.

"Money off bills and into the pockets of working people is my choice. There’s more to do, but this is the year that Britain turns a corner."

The policies announced by the government to drive down people's bills are forecast by the Office for Budget Responsibility (OBR) to lead to a reduction in CPI inflation of 0.4 percentage points in the 2026/27 financial year.

Savers face falling returns despite inflation outlook

Caitlyn Eastell, finance expert at Moneyfacts, said the latest inflation data signalled bad news for savers.

The Moneyfacts Average Savings rate sits at 3.33% as of 21 January, lower than December's rate of inflation.

Anyone with a savings account paying this level of interest is effectively losing money in real-terms and should switch to an account paying a higher rate.

Eastell said: "January is the ideal time for savers to set new financial goals and to check if their savings are working as hard as they can."

According to Moneyfacts, the best-paying easy access account is currently with Chase, which is paying 4.41% interest (including a bonus rate).

The best one-year fixed bond is with Marcus by Goldman Sachs, paying 4.55%. The best easy access ISA is with Plum, paying out 4.28% in interest.

What does higher inflation mean for mortgage rates?

The Bank of England can increase interest rates to curtail rising inflation, but this tends to lead to higher mortgage rates.

That said, the central bank is keen to kick start the economy, so while immediate further rises in interest rates are not likely, mortgage borrowers may have to wait longer for cuts.

David Hollingworth, associate director at broker L&C Mortgages, said: "The rise in the rate of inflation in December was not unexpected but is a larger bump than many anticipated. That could be enough for the Bank of England to pause any thought of another cut when they meet in February."

Hollingworth pointed out a lot of lenders had already priced further cuts to interest rates in 2026 into their fixed-rate mortgages, but today's inflation data could "mean that we’re in for a period where the brakes are applied and mortgage rates flatten out".

Housing and household services the largest contribution to CPIH annual inflation rate for 18th consecutive month

Households will feel the effects of inflation differently

Because the ONS calculates inflation based on a representative basket of goods and services, which is subject to change, households will experience it differently.

For example, if more of your spending is weighted towards food or travel, any rises in these categories will be felt by you more.

Charlotte Kennedy, chartered financial planner at Rathbones, said: "While headline inflation guides monetary policy, it rarely captures the full picture of how price pressures are felt across the economy."

What items were added to the ONS's basket of goods and services in 2025?

As previously mentioned, the ONS tracks price changes across a range of goods and services when reporting its inflation data. What is included in this basket of goods and services is subject to change each year.

In 2025, virtual reality (VR) headsets were added, as well as men's sliders, cushions and ready-to-eat noodles.

Other items already in the basket were taken out, including fresh diced or minced turkey.

When will January's inflation data be released?

The ONS releases inflation data each month for the preceding month. That's why the data released today covers the month of December.

The ONS will release inflation data for January on 18 February.

You can find out when the ONS is set to release inflation, GDP and wages data on its website.

Inflation rises for first time in five months

The last time the CPI measure of inflation rose was in July 2025, when it ticked up to 3.8% from 3.6% the month before.

It stayed at 3.8% in August and September, fell to 3.6% in October and then slowed to 3.2% in November.

Where is inflation headed next?

It's impossible to say for sure where inflation will head next, but the Bank of England has made predictions.

It projects that CPI will fall to 3% in January and to 2.5% by the fourth quarter of 2026.

Further down the line, it expects CPI will slow to 2% by the end of 2027 and then rise to 2.1% by the close of 2028.

Recap: UK inflation rose to 3.4% in December

Here’s a recap of this morning’s UK inflation headlines:

• UK inflation, as measured by the Consumer Prices Index (CPI), rose to 3.4% in the 12 months to December, up from 3.2% in the year to November.
• Alcohol and tobacco, transport and food and non-alcoholic drinks were the main drivers of the uptick in inflation, particularly a 28.6% increase in air fares.
• The jump is widely expected to be short-lived. Bank of England forecasts expect UK inflation to fall to 3.0% in January.

Could petrol price deceleration lower UK inflation?

One counterweight to the general acceleration in UK price increases in December was a slowdown in the pace at which petrol prices rose.

Petrol prices rose by 1.3 pence per litre between November and December 2025 compared to 1.5 pence per litre in the same period a year before.

“Petrol pump price rises slightly levelled off,” said Scott Gardner, investment strategist at J.P. Morgan Personal Investing. “We could see further weakening in the months ahead with recent falls in global oil markets expected to feed through to prices at petrol station forecourts.”

One to watch for motorists and consumers in general over the coming months.

We're going to end our inflation coverage here for today. Thank you for following, and visit our homepage for all the latest personal finance and investing news.

It is a bizarre legal action. Jerome Powell, the chairman of the Federal Reserve, the US central bank, has been prosecuted over renovations of the Fed’s headquarters and may now face criminal charges. Given that it manages an economy worth $30trillion and the world’s reserve currency, it is hard to see that the $2.5billion spent on improving the Fed’s offices really matters much. Even so, Donald Trump has clearly decided to use it as a weapon for a full-scale assault on a Fed chairman he would prefer to get rid of.

Powell himself was clear that the legal attack was just a way of bringing the Fed to heel. “The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preference of the president,” he said in a statement. In other words, it is a political attack on the Fed and an attempt to allow the president to control monetary policy. If Powell is removed from office by the courts, whoever is appointed to replace him will clearly be taking instructions directly from the White House.

That is a dramatic and dangerous development. This is not to deny that independent central banks are worthy of criticism. Over the past 30 years, they have become too powerful, too confident in their own abilities and too quick to print money. You can make a case that, instead of ensuring greater stability, which is what they were meant to do, independent banks have inflated a series of asset bubbles, indulged spendthrift politicians and prioritised trendy causes while allowing industry to be hollowed out. There is a case for reform. Still, there is a big difference between that and a power grab to hand the right to set rates to the White House.

There are two big problems with that. First, it looks as if Trump is determined to control interest rates himself, either directly, or else through a tame proxy at the Fed. That is not without precedent. In Britain, interest rates used to be set by the chancellor, but the result was that the UK had one of the worst records on inflation in the world before Gordon Brown made the Bank of England independent in 1997. And it is hard to think of a worse person to set rates than Trump. He is temperamental, he constantly changes his mind, he doesn’t listen to advice, and his falling approval ratings mean he will constantly try to cut rates to boost short-term demand. Even more seriously, if the president acquires the right to set rates, it’s hard to see how it will ever be given up. It is too major a power to surrender. The US will have a politicised monetary policy permanently.

How bad will it get under Trump?

Everything else the president is doing appears designed to stop the free market working and drive up prices. The US has already imposed the steepest tariffs since the 1930s, with an average levy on imports of 18%. Closing off its markets to global competition will only drive prices higher and quality down. Only last weekend, Trump promised to cap credit-card interest at 10%, the kind of populist policy you would expect from the far left. Trump has also started capping corporate investment in the housing market. He is directing the oil companies to invest in Venezuela regardless of whether there is an investment case for it or not (with oil at $50 a barrel, there probably isn’t). There does not appear to be a coherent plan, but a whole series of interventions to create markets rigged by the government. State-controlled economies always end up with higher prices.

Add it all up, and one thing is clear – sooner or later the US will see a major rise in inflation. How bad will it get? There is no way of knowing for certain, and it will depend on what else is happening in the global economy. But once prices start to rise we know they are very hard to bring under control again. And if US prices rise, that will drive global prices higher. We can expect inflation to spread to Britain and the rest of Europe very quickly. Investors are already positioning themselves for that, with the price of gold hitting record highs every week. Prices of defensive assets will inevitably go a lot higher.

Why is Modern Monetary Theory back in the spotlight?

The leader of the Green Party, Zack Polanski – whose more assertive, charismatic and left-populist tenure has seen the party dramatically surge in the polls to within a few points of both Labour and the Conservatives – speaks about economics and fiscal constraints in a way that’s ominously familiar to observers of the Modern Monetary Theory (MMT) debate.

Last month, Polanski told The New Statesman that “the fiscal rule we need to have is to make sure that inflation doesn’t go higher than the skills and resources that we have in our economy”. In a TV interview, he told Laura Kuenssberg that higher taxes on the wealthy will not be needed under his gigantic public spending plans since “this isn’t about creating public investment, we can do that anyway, we don’t need to tax the wealthy to do that”.

He further argued that loans from the Bank of England are “money we owe to ourselves, it’s not borrowing or a debt in any real sense”. In other words, all classic MMT stuff.

What is Modern Monetary Theory?

MMT is a broad and loose term for a group of economists and adherents, rather than a precise set of policy prescriptions. But essentially MMT is a set of ideas that came to prominence in the 2010s – and popularised by Stephanie Kelton’s book The Deficit Myth – which rest on the assertion that, for a currency-issuing government such as the UK’s, debt is not a significant constraint, at least compared with inflation; that macroeconomic policy can and should be managed through fiscal rather than monetary policy; and that it doesn’t matter if the two are blurred.

In orthodox economics, the idea of printing money to solve a nation’s problems is near-universally seen as a very bad one. In contrast, MMT proposes that nations that issue their own “fiat” currencies can freely create and spend their own money, and that this need not devalue the currency, create inflation or lead to economic meltdown.

What else does it say?

That governments should use their fiscal budgets to “manage demand and maintain full employment”, says The Economist – that is, tasks now assigned to monetary policy, set by central banks. It also holds that the main constraint on government spending is not the harsh realities of the bond market, but the availability of underused resources, such as jobless workers. Raising spending when the economy is already at capacity can lead to rapid inflation, thus the purpose of taxes is to keep inflation in check. “Spending is the accelerator, taxation the brakes. Fiscal deficits are irrelevant as long as unemployment is low and prices are stable.”

Thus, in the MMT worldview, the established idea that high public debt is a drag on economies, and a burden on future generations, is turned on its head. Proponents argue that, on the contrary, private citizens and businesses tend to do better in countries running high levels of government (or fiscal) debt. Taken to its logical extreme, MMT allows high spending without taxes or borrowing – a truly radical idea sometimes derided as the Magic Money Tree.

Why has Modern Monetary Theory been taken seriously?

Because utopianism is seductive and contagious. Although MMT has been widely attacked by mainstream economists (including well-known left-leaning economists, such as Paul Krugman), its attractions are obvious in terms of funding ambitious spendthrift political programmes – especially given the low-growth environment since the great financial crisis.

Many economists (not just left-wingers) think that a too-conservative, “austerity” approach to deficits has led to needlessly contractionary policies, especially during recessions (for example, in the UK in the early 2010s). At the very least, MMT offers a useful critique of the too-simplistic analogies between government budgets and household finances that dominate public discourse.

And proponents would argue that MMT aligns with empirical observations that have embarrassed orthodox macroeconomics. For example, Japan has sustained very high public debt levels for decades without triggering inflation or a bond-market revolt.

But it is wrong?

Yes. At its heart, MMT stems from “a question that young children often ask”, says Christopher Snowdon in The Spectator. If there are so many poor people in the world, why can’t we print lots of money and give it to them? The answer is that we can. As Alan Greenspan once put it, “there’s nothing to prevent the federal government creating as much money as it wants”.

The trouble is that printing money won’t increase the number of goods and services. It will only make them more expensive thanks to inflation. As the Bank of England ex-chief economist Andy Haldane expressed it, Modern Monetary Theory is not modern (it is a descendent of discredited ideas from the early 20th century), not monetary (it’s a political project) and not a theory (more wishful thinking).

What should investors do?

Not worry too much for now. Most analysts thought that, on the left, the post-Covid inflation spike had killed off MMT for good. On the right, the final nail in the coffin was – ironically enough – the supposedly pro-growth Truss-Kwarteng mini-Budget of 2022, which demonstrated that excessive borrowing can indeed cause financial distress for a country without an international reserve currency.

But investors might want to remain alert for further signs among the leadership of political parties of MMT-style thinking. British politics is in a time of extraordinary flux and the years ahead may well produce unlikely coalitions that would have seemed absurd even a few years ago. In 2017, Jeremy Corbyn’s Labour party won 40% of the popular vote with his plan for “People’s QE” – a first cousin to MMT that proposed printing money to fund direct government investment. MMT is a form of populist thinking that has the potential to be very popular indeed.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

UK inflation: Summary

• The Office for National Statistics (ONS) releases the latest UK inflation data today (17 December).
• The Consumer Prices Index (CPI) rose 3.2% in the 12 months to November, below the Bank of England's expected 3.4%. Some analysts had forecast a reading as high as 3.6%.
• CPI fell by 0.2% between October and November.
• A slowdown in food, alcohol and tobacco prices was the biggest disinflationary driver.
• Last month, data showed that CPI rose 3.6% in the 12 months to October, down from 3.8% in the previous three months.
• The UK’s current inflationary cycle is expected to have already peaked for 2025.
• The Office for Budget Responsibility (OBR) expects inflation to fall to 2.5% in 2026, and to the Bank of England’s target 2% rate the following year..

| What is inflation? | CPI versus RPI inflation | Upcoming CPI release dates |

Good afternoon, and welcome to our live coverage ahead of tomorrow’s UK inflation data release.

The final week before Christmas is a big one for UK macroeconomic news. Today saw the release of labour market figures showing that UK unemployment rose to 5.1% in the three months to October, while tomorrow we have the ONS’s inflation data release.

Both those releases will be front and centre when the Bank of England’s Monetary Policy Committee (MPC) meets on Thursday. A weakening economy will strengthen calls for an interest rate cut, but tomorrow’s inflation data could pose a head-scratcher for the committee if the CPI figure remains elevated.

Follow our preview and reaction coverage of the latest UK inflation data release in this live report. MoneyWeek will also be reporting on the MPC meeting later in the week.

When is UK inflation data announced?

The ONS will release the latest UK inflation data tomorrow (17 December) at 7am.

We’ll bring you live coverage of the release as it happens as well as reaction and analysis afterwards.

What is CPI?

The Consumer Prices Index (CPI) is the headline measure of inflation that is used by the ONS and policymakers to measure the pace of price increases.

CPI is calculated based on annual changes in prices of a basket of goods that reflect broad consumption patterns in the economy. The MPC targets an annual rate of CPI inflation of 2%, which is viewed by most economists as a healthy level of inflation.

While too much inflation is bad, as it can make goods unaffordable for much of the population, too little is also viewed as economically unhealthy. If inflation turns negative (so prices are falling across the economy), it is called deflation, and it can be very damaging economically.

Most countries use CPI as the headline measure of inflation, but there are other means of measuring it.

For example, the Retail Prices Index (RPI) includes measures that are related to home ownership.

We explain the difference between CPI versus RPI inflation in a separate piece.

What are the expectations for UK inflation?

According to last month’s Monetary Policy Committee report, the Bank of England expects inflation to have fallen by 0.2 percentage points to 3.4% in the 12 months to November.

Not all economists agree. Andrew Goodwin, chief UK economist at economic advisory firm Oxford Economics, predicts an inflation read of 3.6%. Robert Wood, chief UK economist at research firm Pantheon Macroeconomics, expects the read to come in at 3.5%.

“We expect year-over-year airfares inflation to surge to 12.3% in November from 0.9% in October, as a large fall in ticket prices last November drops out of the annual comparison,” said Wood.

Bank of England projections see CPI inflation averaging 3.5% in the fourth quarter of 2025, before falling to 3.1% in the first quarter of 2026.

Charting UK inflation

UK inflation was trending downwards following a peak in October 2022.

That trend has reversed this year, largely thanks to the impact of last year’s Autumn Budget which contained several inflationary measures like an increase to the minimum wage.

September was expected to mark the high point of the latest bout of inflation, at 4%. As it happened, the month marked the end of a three month plateau at 3.8%, before inflation fell to 3.6% in October.

Will we see another dip when the ONS figures are released tomorrow, or is UK inflation set to plateau again?

Inflation data unlikely to comfort households at Christmas

Expectations for tomorrow’s inflation read range between 3.4-3.6%. But households are likely still feeling the squeeze, according to Tamsin Powell, consumer finance expert at Creditspring.

“While prices may not be rising as quickly as they have done previously, they are still rising faster than wages for many,” she said. “The prolonged period at this level continues to squeeze already stretched budgets.”

Powell added that the timing of the final read of the year is “particularly difficult as families head into the festive period, when spending on food, travel and socialising typically rises”.

However, the longer term picture is more upbeat.

“Inflation is widely expected to move onto a clearer downward path in 2026, supported by easing energy costs and continued government measures such as the fuel duty freeze,” said Powell.

Thanks for following live coverage ahead of tomorrow's UK inflation data. That concludes coverage for today, but join us first thing tomorrow morning for live coverage of the release as it happens.

Good morning, and welcome back to live coverage of today's UK inflation data release. We're just a few minutes away from the ONS announcing November's inflation figures. Stay with us for live coverage and rolling reaction and analysis.

BREAKING: UK INFLATION FELL TO 3.2% IN NOVEMBER

Food and alcohol bring UK inflation below expectations

A slowdown in alcohol and food inflation seems to have been the main driver behind this unexpectedly low inflation reading.

More analysis and reaction to follow.

UK Inflation at its lowest level since March

That reading of 3.2% is the lowest CPI reading since March (2.6%), which preceded a jump to 3.5% in April as some of the more inflationary measures from chancellor Rachel Reeves’s first Autumn Budget took effect.

Lower food, alcohol and tobacco inflation seem to have driven the drop.

“Lower food prices, which traditionally rise at this time of the year, were the main driver of the fall with decreases seen, particularly for cakes, biscuits, and breakfast cereals,” said Grant Fitzner, chief economist at the ONS.

“Tobacco prices also helped pull the rate down, with prices easing slightly this month after a large rise a year ago. The fall in the price of women’s clothing was another downward driver.”

While the cost of raw materials for businesses rose, there was a slowdown in the increase of the cost of goods leaving factories.

Services remain the main driver of inflation

Looking more closely at today’s UK inflation figures, services inflation, which has remained sticky throughout the current inflationary cycle, is still the biggest driver of inflation.

In the 12 months to November, services CPI rose 4.4%. Goods CPI ran at 2.1% in that period – only fractionally above the Bank of England’s target rate for all CPI.

On a monthly basis, CPI fell by 0.2% in November.

Reeves responds to inflation report

Chancellor Rachel Reeves has responded to this morning’s inflation report, saying that families across the country that are concerned about their bills will welcome the fall.

“Getting bills down is my top priority. That is why I froze rail fares and prescription fees and cut £150 off average energy bills at the Budget this year,” said Reeves. “The Bank of England agree this will help cut prices and expect inflation to fall faster next year as a result.”

Lower-than-expected inflation increases the chance of an interest rate cut

The Bank of England’s Monetary Policy Committee (MPC) meets tomorrow, and today’s unexpectedly low inflation read combined with recent weak economic data ramps up the likelihood that the Bank will deliver an interest rate cut at its final meeting of the year.

“Today’s news is a bright spot for the Bank of England, government and consumers alike,” said Isaac Stell, investment manager at Wealth Club – though he cautioned that there is still a way to go before headline inflation rates return to the Bank’s 2% target.

“Looking ahead, barring any surprise change of heart, markets expect the Bank of England to press ahead with one final cut for the year to the base rate,” said Scott Gardner, investment strategist at J.P. Morgan Personal Investing.

Beyond CPI: more November inflation metrics

As we have mentioned earlier, CPI – while the headline rate that is most closely-watched by policymakers – is not the only measure of inflation.

Nor is it the most comprehensive: that mantle goes to the Consumer Prices Index including owner occupiers' housing costs (CPIH). UK CPIH rose 3.5% in the 12 months to November, down from 3.8% in the 12 months to October.

Core CPI and core CPIH are versions of each of these indices that remove more volatile categories such as food, alcohol, energy and tobacco.

Core CPI rose 3.2% in the 12 months to November, down from 3.4% the previous month, while core CPIH rose by 3.5% – down from 3.7% in October.

^{Source: Office for National Statistics}

Food and drink dragged UK inflation downwards

Here’s a closer look at how the different categories impacted CPI in the 12 months to November:

Food and non-alcoholic beverages as well as alcohol and tobacco were the two most disinflationary categories, both taking 0.07% off annual CPI inflation.

Clothing and footwear followed with an annual impact of -0.06%.

Communication added 0.01% to annual CPI inflation.

Recap: UK CPI inflation fell to 3.2% in November

Here’s a recap on the UK inflation headlines today:

• Headline UK inflation as measured CPI rose by 3.2% in the 12 months to November.
• The Bank of England had forecast a rise of 3.4%, while some economists expected an inflation rate of 3.6%.
• Food and non-alcoholic beverages as well as alcohol and tobacco were the two most disinflationary categories.
• CPI fell by 0.2% on a monthly basis.
• CPIH rose 3.5% in the 12 months to November, down from 3.8% in the 12 months to October. Core CPI rose 3.2%, down from 3.4%, while core CPIH rose 3.5%, down from 3.7%.

Services inflation still a concern

Looking at goods alone, CPI ran barely above the Bank of England’s target rate in the 12 months to November.

It is the services sector that is keeping UK inflation elevated.

“Service sector inflation will certainly be an area of concern, with the cost of eating and staying out elevated as businesses attempt to deal with last year’s Budget measures which increased labour costs,” said Danni Hewson, head of financial analysis at AJ Bell.

Hewson cautions that falling inflation doesn’t mean the cost of living is getting cheaper – inflation measures the pace of price increases, and 3.2% is still well above the target level.

“But the bigger than expected fall in headline CPI is good news and will help boost people’s spending power and confidence,” she added. “With so much of the UK economy reliant on household spend, it could also signal better news for the UK’s flatlining growth.”

UK inflation is trending down

November’s headline inflation figure, with CPI rising 3.2% annually, is the lowest the measure has stood since March this year.

It continues a welcome trend of falling inflation, with the period from July to September when CPI rose 3.8% for three consecutive months marking the peak of the current inflationary cycle.

Based on data from the MPC’s last meeting in November, Bank of England staff expect UK inflation to average 3.5% in Q4 before falling to 3.1% in Q1 2026 and 2.9% in Q2.

Moneyfacts: savings are being hit by inflation

We’ve had a slightly unusual combination of falling interest rates alongside elevated inflation this year.

That’s bad news for savers, who see their returns squeezed in nominal terms by falling rates, and in real terms by inflation eroding their buying power.

“This year inflation has averaged 4.01% and the Moneyfacts Average Savings Rate at 3.50%, meaning cash savings have failed to keep pace,” said Caitlyn Eastell, spokesperson at Moneyfacts.

“For someone with £10,000, this equates to being around £50 worse off in real terms.”

Eastell recommends that savers shop around for the best deals to ensure that their money is working as hard as possible for them.

Alternatively, savers could consider starting to invest some of their money in a stocks and shares ISA. Historically, stock market trackers have tended to outperform cash savings and generate inflation-beating returns.

Research from Fidelity International found that £20,000 saved into a cash ISA on 6 April 2017 would have been worth £23,549 by October 2025. But to keep up with inflation over that period, it would have needed to grow to £27,000.

The same amount invested into a global tracker fund in a stocks and shares ISA would have grown to £50,700, according to the analysis.

Are we nearing an end to the inflationary cycle?

Aside from September 2024, when annual CPI inflation briefly dipped to 1.7%, inflation has been running above the Bank of England’s 2% target rate ever since July 2021.

But with inflation having fallen by more than expected in the year to November, is the end of the current inflationary cycle now in sight?

“After a prolonged period of elevated inflation, the latest figures suggest the economy is entering the final stretch towards more normal levels,” said Charlotte Kennedy, chartered financial planner at Rathbones. “Measures announced at the Budget – such as freezing rail fares until 2027, cutting fuel duty, and reducing energy bill costs – are expected to shave around 0.5 percentage points off headline inflation by the middle of next year.”

However, Kennedy cautioned that we are not out of the woods yet.

“It remains important to recognise that each of us experiences a personal inflation rate based on our individual spending habits. Making the necessary adjustments is key to maintaining financial resilience - especially during the festive period, which is often characterised by excessive spending.”

What the latest UK inflation data means for interest rates

A 25 basis point cut to interest rates had been widely expected for the Monetary Policy Committee’s (MPC) meeting tomorrow, even before the surprisingly large drop in CPI inflation.

The inflation surprise “de facto locks in” the cut, according to Kallum Pickering, chief economist at investment bank Peel Hunt.

Pickering also observed that the likelihood of a successive rate cut in the first quarter of next year has increased off the back of today’s data.

“The danger now is that the BoE keeps its policy too tight for too long,” he said. “No growth since summer, a rapid cooling of the labour market, elevated household saving and a sluggish housing market are all obvious signs of tight money.

“These data are hard to square with the lingering hawkishness at the BoE,” he added.

Tell us your thoughts – where is UK inflation going?

Today’s UK inflation read marked a surprisingly large drop in UK inflation. Where do you think inflation will go between now and the end of next year?

UK inflation recap

As a reminder, the headline CPI inflation figure fell from 3.6% in the year to October to 3.2% in the year to November. That’s a much steeper drop than had been expected, though it still leaves UK inflation well above the Bank of England’s target 2% rate.

The big question now is whether this will prompt the MPC to cut interest rates when it meets tomorrow.

We're going to end our inflation coverage here in the meantime. Thank you for following, and visit our interest rates report for more analysis of how today's inflation data could impact UK interest rates.

Renewable energy trusts were already struggling before the government decided to kneecap them at the end of October. In a major shock, it has launched a consultation on changing the inflation linkage on the subsidies they receive from the retail price index (RPI) to the consumer price index (CPI) in April 2026, three years sooner than expected.

Even worse, the government has floated a second, complex option that would backdate the switch to 2002. This may have been thrown in mainly to make a April 2026 change sound like a concession, but if actually implemented could reduce the income received by generators by billions of pounds over the coming years. The market reacted accordingly and the sector as a whole lost about 5% of its market value on the day.

Why is the renewable energy trusts industry struggling?

The proposals have created yet another cloud of uncertainty over a sector that was already unloved by investors. The industry has been caught in a “perfect storm” and is ill-equipped to deal with its current challenges, says Pietro Nicholls of RM Funds, an activist that has been battling battery-storage fund Gore Street Energy Storage Fund (LSE: GSF). Many of the trusts’ boards lack the experience required to address these problems, he argues. So instead, they’ve turned to easy ideas such as share buybacks.

Part of the problem is uncertainty over reported net asset values (NAVs). “An infrastructure or renewable investment trust NAV calculation is generally based on a number of different asset-specific (eg, output, power prices or project cash flows) and macro (eg, inflation or foreign exchange rate) assumptions, with individual trusts using different inputs to calculate the NAV value,” says Ashley Thomas of broker Winterflood. For example, if Greencoat UK Wind (LSE: UKW) were to use the same power price assumptions as Renewables Infrastructure Group (LSE: TRIG), its NAV would be lower than currently reported, estimates Winterflood. Since these are just assumptions, it is hard to say which numbers are more appropriate, but with so many variables, NAVs are undoubtedly highly subjective and volatile. Across the sector over the past 18 months, NAV changes have ranged from +8% to -7%, says Winterflood.

Feuding with renewable energy trust managers

It is regrettable that many managers were paid fees based on a percentage of NAV rather than performance. This became increasingly controversial once shares traded far below NAV. In the past year, many trusts have belatedly shifted to levying fees on a 50/50 mix of NAV and market value (or in UKW’s case, entirely on market value). Dealings with managers are becoming a common point of contention. Take Aquila European Renewables (LSE: AERI), which has agreed to sell assets to another fund advised by Aquila at a large discount to the current NAV, says Nicholls. How can the same manager assign two different values to the same assets? Or take a plan by Bluefield Solar Income Fund (LSE: BSIF) to merge with its manager, saying this would make to easier to invest in new projects. The trust has instead put itself up for sale after a backlash. Or just this week, TRIG has said it will merge with HICL Infrastructure (LSE: HICL), run by the same manager.

These developments show a lack of concern for investors, says Nicholls, which is clouding the real value of the assets. “If boards were more respectful of shareholders, the share prices would be a lot higher.”

It isn’t clear what it will take to shift sentiment towards the sector. The government’s consultation certainly won’t help. Still, there needs to be a substantial change in the way these trusts are run, with a primary focus on the interests of shareholders. Only then can investors begin to trust NAVs are what managers say they are.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

• The Office for National Statistics (ONS) has confirmed that the Consumer Prices Index rose by 3.6% in the year to October, a fall from the three preceding months
• The Bank of England (BoE) had previously expected September to mark the high point of the current phase of inflation
• Inflation as measured by the Consumer Prices Index (CPI) came in at 3.8% for September, below expectations of 4% and unchanged from August and July
• The BoE’s Monetary Policy Committee held interest rates unchanged earlier in November, despite a weakening UK economy, over concerns about persistent inflation.

| What is inflation? | CPI versus RPI inflation | Upcoming CPI release dates |

Good afternoon, and thank you for joining our live coverage of the upcoming UK inflation data release.

Tomorrow morning, the Office for National Statistics ONS will announce the latest inflation data, covering October.

This is something of a pivotal release as far as the current inflation cycle is concerned, as the Bank of England’s forecasters expect the previous month to have marked the peak of the inflation cycle.

The headline CPI figure for September was unchanged from August, at 3.8%. If they are to resume their interest rate cutting cycle, policymakers will be looking for tomorrow’s inflation figure to come in below that level and confirm the current hypothesis – even though the number was below where most analysts had expected CPI would be for September.

Follow along for rolling preview and analysis today, plus live coverage of and reaction to the data release tomorrow morning.

When is UK inflation data released?

The ONS will release the latest UK inflation figures at 7am tomorrow (19 November). We’ll cover the release live here, and bring you live reaction afterwards.

See our explainer on upcoming CPI release dates for the calendar of future ONS inflation releases.

Where did inflation go in 2025?

Inflation has been on the rise for much of 2025, climbing from 3% in January to 3.8% in September, the latest month for which data is available.

Price growth fell in the first quarter of the year, going down to 2.6% in March. However, a combination of bill increases, minimum wage hikes, and disruption to global trade meant this decline was short-lived.

Inflation jumped 0.9 percentage points between March and April, reaching 3.5% – it was the largest month-on-month increase in inflation since October 2022, at the height of the cost of living crisis.

Since then, inflation has remained stubbornly high, climbing to an 18-month high of 3.8% in July and remaining at that level in August and September.

What do analysts expect for October UK inflation?

According to its November report, the Monetary Policy Committee (MPC) – the group within the Bank of England responsible for setting interest rates – expects inflation to fall from the September figure of 3.8% thanks to cooling in energy and food price increases as well as the inflationary impacts of the last Autumn Budget having worked their way through the system.

As such the MPC expects inflation to fall to 3.5% in the fourth quarter of 2025.

For October in particular, analysts expect to see a drop in inflation from the 3.8% level it sat at for the three preceding months.

“We estimate UK inflation will slightly improve in October's figures, slowing to 3.6% - a 0.2% improvement on the previous month,” said Grant Slade, UK economist at Morningstar. “The disinflation process remains intact, in our view. A weakening labour market and well-anchored long-term inflation expectations should allow for the impact of prior supply-side shocks to fade progressively over the coming quarters.”

Robert Wood and Elliott Jordan-Doak, chief UK economist and senior UK economist respectively at Pantheon Macroeconomics, forecast October inflation to fall to 3.5%.

What is inflation?

In brief, inflation measures the speed at which prices are rising.

Economists, particularly those at the ONS, measure price changes in a basket of goods that represent general spending patterns. Inflation typically refers to the percentage change in prices of that basket of goods over a 12-month period.

There are various different baskets that can be analysed for different purposes, but the key one as far as most economists and policymakers are concerned is the Consumer Prices Index (CPI) – unless specified, it’s that figure we’re referring to here when we cite ‘inflation’ figures (like the 3.8% figure from September).

Read more on different inflation measures here: CPI versus RPI inflation.

It is important to remember that inflation measures the rate at which prices are changing. If CPI falls from 3.8% to (say) 3.6%, that doesn’t mean prices have fallen (what’s known as ‘deflation’), but that the pace at which they are increasing has slowed.

The Bank of England, along with most central banks, targets a 2% annual rate of inflation, which is seen as economically healthy. Inflation running significantly above this level makes basic necessities unaffordable for lots of people, while running below this can be bad for economic growth.

Economist: October inflation data should kick off gradual easing

Andrew Goodwin, chief UK economist at Oxford Economics, says “October’s inflation release is likely to mark the beginning of a gradual easing in price pressures.”

He thinks that the impact of energy costs on annual inflation is likely to fall by a little over 0.2 percentage points, following a smaller increase in the energy price cap this year compared to last.

“Though there will be some mitigation from higher petrol prices, with the base effects running in the opposite direction to energy, we expect CPI inflation to fall to 3.6% from 3.8% in September,” said Goodwin.

Why inflation could surprise to the upside

It’s being widely assumed that annual inflation will have fallen between September and October, with most experts predicting a headline figure of around 3.6%.

But Sanjay Raja, chief UK economist at Deutsche Bank, thinks it could surprise to the upside. He expects UK inflation for October to come in at 3.7%.

“Larger rises in airfares and university fees, we think, will push inflation up a leg,” said Raja.

He added, though, that he expects this to “mostly unwind in November”.

Thanks for following our inflation coverage today. We're pausing here for tonight, but join us first thing tomorrow for the data release, which we'll report on live from 7am.

UK inflation day – how did prices change in October?

Good morning and welcome back to live coverage. We’re just minutes away from finding out how prices changed during the year to October.

As a recap, most analysts are expecting a drop from last month’s reading of 3.8%, to somewhere around 3.5% or 3.6%.

Stay with us as we bring you live news of the latest data, plus a wealth of reaction.

BREAKING: UK inflation fell to 3.6% in October

The latest UK inflation data is in, and confirms that the UK Consumer Prices Index increased by 3.6% in the year to October, a slowdown compared to the three preceding months.

CPI drop driven by falling housing costs

UK inflation fell from 3.8% in the year to September to 3.6% in the year to October. The biggest driver to the slowdown in price increases came from housing and household services costs, which fell from 7.3% in the year to September to 5.2% in the year to October.

Food and drinks the largest offset to slowing price increases

While housing costs slowed their pace of increase, food and non-alcoholic beverages made the largest upward contribution to inflation in the year to October. The rate of price increases in this division increased from 4.5% in the year to September to 4.9% in the year to October.

Will the fall in UK inflation lead to an interest rates cut?

Policymakers at the Bank of England have been waiting for confirmation of their hypothesis that inflation is easing before cutting interest rates further. At high level, today’s inflation read seems to give them that.

There is a potential spanner in the works, though, in the form of chancellor Rachel Reeves’ upcoming Autumn Budget.

“Evidence inflation has peaked should tip the scales towards a December rate cut. But any further rate cuts will largely depend on the contents of the Chancellor’s red box,” said George Brown, senior economist at Schroders. “If VAT and green levies are eliminated from household energy bills, inflation could fall by as much as half a percentage point.”

Brown believes that broader price pressures could linger, with wage growth remaining above target pace especially compared to productivity.

“The Bank must tread carefully given the heightened risk that high inflation becomes entrenched,” he added.

Reeves responds to fall in UK inflation

Chancellor Rachel Reeves has issued a response to the fall in UK inflation during the year to October:

“This fall in inflation is good news for households and businesses across the country, but I’m determined to do more to bring prices down,” said Reeves. “That’s why at the budget next week I will take the fair choices to deliver on the public’s priorities to cut NHS waiting lists, cut national debt and cut the cost of living.”

UK inflation drop is welcome, but picture still mixed

The economic picture is still mixed for UK consumers despite this drop in UK inflation figures.

“An almost 10% depreciation in GBP vs the Euro is adding to the cost of European imports,” said Brad Holland, director of investment strategy at J.P. Morgan Personal Investing. “Petrol and domestic gas prices are lower than they were at the start of the year… Goods inflation pressure is moderate at the moment and services inflation remains the key focus.”

Good CPI inflation fell from 2.9% in the year to September to 2.6% in the year to October, while services inflation fell from 4.7% to 4.5%.

Holland added that with the latest UK growth figures proving lacklustre, there will be pressure on the Bank of England to cut interest rates at its final meeting in December given today’s indication that UK inflation is on its way down.

Inflation figures show monetary policy is working

October’s fall in UK inflation shows that “restrictive monetary policy is working”, says Daniel Casali, chief investment strategist at wealth manager Evelyn Partners.

“Importantly, service producer price inflation (a leading indicator for consumer services inflation) has also started to trend lower, suggesting further disinflation ahead in labour-intensive sectors,” he added.

There is speculation that the Autumn Budget will have to include tax rises in order for Rachel Reeves to meet her fiscal rules. If so, that would act to reduce household disposable income and dampen demand, which should act as a further brake on inflation.

“This fiscal tightening complements monetary restraint, accelerating the path toward the Bank’s 2% inflation target. In short, this makes it harder for the MPC to justify holding rates at current restrictive levels deep into 2026,” said Casali.

Could we see a Christmas rate cut?

Bank of England governor Andrew Bailey indicated at the last Monetary Policy Committee meeting that future data releases before the final interest rates meeting of the year would be key to determining whether there would be a final cut in 2025.

Today’s data puts that firmly on the table in the opinion of Isaac Stell, investment manager at Wealth Club.

“Having remained elevated throughout the summer, it looks as if the inflationary descent is starting to gain momentum. The possibility of a pre-Christmas rate cut is now very much on the cards,” said Stell.

“All eyes now turn to the Budget,” Stell continued. With the expected fiscal tightening in the form of tax rises a foregone conclusion, policy makers at the BoE will be watching closely to see how these measures affect growth and demand.”

Services inflation is cooling

One of the big highlights in the October UK inflation data was the fall in CPI services inflation from 4.7% to 4.5%. This has been a particularly sticky part of the UK’s inflationary picture, and its cooling off points to the success of the Bank of England’s monetary tightening.

“Weaker than expected travel fares, tuition fees, and accommodation prices all [pulled] services price momentum a touch lower than market expectations,” said Sanjay Raja, chief UK economist at Deutsche Bank.

“Our suite of core services measures, which strips out some of the more volatile and erratic items in the basket, were also broadly positive – highlighting continued disinflation in the economy,” Raja continued.

He added that this gives the MPC a clearer path towards a December rate cut, with Bank of England governor Andrew Bailey likely to hold the deciding vote.

UK inflation recap: headline metrics

To recap: the headline rate of CPI inflation fell from 3.8% in the year to September (which Bank of England forecasters had expected to mark the high point of the current inflation cycle) to 3.6% in the year to October.

Here are some more key inflation indicators. Our explainer on CPI versus RPI inflation will fill you in on some of the terms here.

^{Source: Consumer price inflation from the Office for National Statistics}

Inflation fell for the first time since May

What does falling inflation mean for your savings?

Some savers will be breathing a sigh of relief after inflation fell for the first time in five months, as slowing price growth their savings will be eroded away far slower.

But while inflation is going in the right direction, a reading of 3.6% is certainly not low – and far above the Bank of England’s target of 2%.

What is more, inflation being this far above target means it is still far higher than the interest rates offered by many savings accounts, meaning consumers are seeing their cash become less valuable in real terms.

The interest rate for the average easy access savings account is around 2.5%, according to Hargreaves Lansdown, meaning a 1.1 percentage point gap exists between the average savings account and the rate of inflation.

The good news is that while the average savings rate is lower than inflation, there are still a lot of competitive options on the market.

Mark Hicks, head of active savings at Hargreaves Lansdown, says: “The market is incredibly competitive right now – especially for easy access and cash ISA. It means it’s more important than ever to shop around and consider online banks and savings platforms, because there are still plenty of accounts leading the pack, way ahead of inflation.

For money you don’t need for a specific period, it’s also well worth considering locking in a fixed rate deal now. You can get fixed terms around 4.4%, which look increasingly attractive at a time when rates and inflation are both expected to fall from here.”

The top easy access savings account on the market currently pays an interest rate of 4.55%, provided by West Brom building society, while the best one year fixed saver by Monument Bank offers 4.47%.

BestInvest: Softer inflation a boost for homeowners and buyers

There is some room for optimism among homeowners and prospective buyers after October’s inflation figures were released as slowing price growth offers a boost to affordability.

A December interest rate cut has become more likely because of falling inflation too, setting the stage for a further boost for mortgage payers.

Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, said: “Easing inflation does bode well for affordability, as it raises the likelihood of further interest rate cuts.

“Mortgage rates have continued to fall in recent days, so a more competitive mortgage landscape, combined with more relaxed stress test rules and slowing market activity ahead of the Budget, provides an opportunity for committed buyers to capitalise.

“When a market hesitates in the face of change, it can be one of the best times to secure a deal,” she added.

Meanwhile, those who are coming to the end of their mortgage term and are shopping around for a better deal may also be able to find a better deal, but a lot depends on how long ago they fixed their rate.

Haine said: “Those coming off short-term fixes taken when rates peaked in 2023 may find better deals now. However, borrowers nearing the end of ultra-low five-year fixes secured before rates began their rapid ascent in late 2021 face a tougher outlook.

“They could see a sharp rise in monthly repayments unless they’ve significantly reduced their balance – though the blow may be softened if mortgage rates continue to ease.”

Where is inflation going next?

For the moment, it appears that the Bank of England’s forecasts for the long-term trajectory of UK inflation is intact.

The good news is that this should see prices fall over the next two years. The Bank of England expects it to recede to the target level of 2% by the end of 2027.

“Looking ahead, inflation is likely to remain at similar levels over the final months of this year, but several factors should pull the headline rate down through next year,” said Edward Allenby, senior economist at Oxford Economics.

Energy prices ought to act as a drag to inflation from next year as their pace of increase slows, while Allenby also feels that food price inflation has peaked and that weaker food commodity prices and a stronger pound should bring food inflation down in 2026.

“Services inflation is expected to ease steadily due to cooling pay growth and strong base effects caused by this year's increase in national insurance contributions,” he added.

Inflation, interest rates, and what it means for savers and investors

The last Monetary Policy Committee (MPC) meeting resulted in a 5-4 split in favour of holding interest rates at their prior level (4.0%), with four members of the panel voting to cut rates to 3.75%.

With the economic situation deteriorating and CPI inflation coming down, a rate cut in December looks very likely according to Nigel Green, CEO of deVere Group.

“We believe that there’s now a high probability of a Bank of England December rate cut,” he said.

That has different implications for your money, depending on whether you favour saving or investing.

“The likely December rate reduction by the Bank of England marks a transition point. For savers, this means challenge; for investors, it means opportunity for those who act with insight,” said Green.

Interest rates falling even as inflation remains above target is bad news for savers, as higher inflation eats into diminishing returns.

It’s more complicated for investors, as lower interest rates increase the present value of future cash flows from equities, bonds and real assets.

“The early adopters in such environments stand to benefit; those who cling to yesterday’s assumptions may be late to the party,” said Green.

Rathbones: "The Budget die is cast"

In terms of macroeconomic data, today’s UK inflation release is the last piece of the puzzle before chancellor Rachel Reeves announces her Autumn Budget on 26 November.

“The die is cast,” said John Wyn-Evans, head of market analysis at Rathbones. In terms of economic data that could shift the chancellor’s thinking, “there is nothing of note between now and 26 November. After what feels like months of speculation, we are now at the sharp end.”

Viewed purely through the lens of inflation control, an increase in income tax – which Reeves hinted at during her unusual pre-Budget speech on 4 November – could have been a benefit, as the tax hike would have acted as a dampener on spending and, as such, had a disinflationary impact.

But Reeves appeared to U-turn on this front last week, as the Labour government came under attack from within its own party.

“By abandoning the idea of raising income taxes, the chancellor could still be more dependent upon raising levies that increase inflation, such as taxes on any sort of consumption,” said Wyn-Evans. “Thus, we would expect the Bank of England to reserve judgement until it has seen the contents of the red briefcase.”

Recap: UK inflation falls for first time since May

Here’s a recap on the major headlines from today:

• UK inflation, as measured by the Consumer Prices Index (CPI), fell to 3.6% in the year to October – the first time the headline figure fell since May.
• A slowdown in the rate of increases of housing and household services costs was the main driver behind the headline figure falling, while food and non-alcoholic drink prices provided upward pressure on inflation.
• Services inflation, which has been sticky in recent months, fell from 4.5% to 4.7%.
• Analysts now view an interest rate cut in December as likely – though much will depend on Rachel Reeves’s Autumn Budget next week.

Will the Budget reignite inflation?

The recent bout of inflation – which today’s data seems to put in the rear-view mirror – was partly driven by inflationary measures in last year’s Autumn Budget, such as an increase to employers’ national insurance which came into effect in April.

“An increase in employer national insurance from April undoubtedly flowed into business costs and then onto consumers, so the chancellor will be keen to avoid any further policies that further ignite price rises and weigh on growth,” said Rob Morgan, chief investment analyst at Charles Stanley.

And while Reeves will likely target less inflationary measures so as to safeguard stretched household finances, she faces a precarious balancing act with the economy seemingly fragile.

“Targeted raids on income tax, residential property, banks and gambling companies will likely be the order of the day to help fill the fiscal hole without upsetting the growth applecart,” said Morgan.

Thank you for following our coverage of October's inflation data.

Join us next month when we report on November's figures, which will be released on 17 December.

Bond and equity investors are fundamentally in opposition. A bondholder cares only about receiving their interest and capital; anything that puts that in danger is bad. The ideal borrower might be one that takes your cash, parks it in ultra-safe assets to protect the principal and makes paying the coupons the only priority for its cash flow. There is no upside if the borrower takes risks. In fact, there is not even much value in long-term survival: the borrower can fail due to a lack of investment and the bondholder is still happy if they have been repaid in full.

On the other hand, equity – “the fine sliver of hope between assets and liabilities”, as Russell Napier calls it – hopes to profit from growth in earnings or assets. Shareholders want the company to take some kind of risk because they benefit if that risk pays off. If that might increase the chance that loans aren’t repaid, so be it.

This is well understood by markets. Nobody expects bondholders and shareholders to speak in each others’ interests. Yet when it comes to the public finances, that gets completely lost.

All about the bonds

Today, we hear endless talk about why the chancellor needs to cut spending, raise taxes or both. Look at this through the bond-equity framework, and we can see that this is framed in bondholders’ terms: it’s all about making them feel more secure. The discussion rarely touches on whether borrowing is rising because of current expenditure or long-term investment.

Bond investors could make a very valuable intervention by signalling that borrowing to invest in the infrastructure that Britain needs (with a well-costed plan) would be seen very differently from borrowing to fund profligate current expenditure. Yet most talking points simply boil down to “large deficit = bad”.

This reasoning gets stretched into some bizarre pretzel logic. Raising taxes will slow growth since disposable income will be reduced, we are told approvingly. That may curb inflation and allow interest rates to be lowered, which is good for bonds. Yet the idea that anybody else would want weaker growth in an economy that is clearly not overheating is frankly unhinged.

Equity holders in this scenario are everybody who benefits from a stronger economy and more investment. And this is where long-term consequences of the current mindset look so worrying. Consider the visible deterioration in physical and social infrastructure in Britain. Failure to fix this because the government is cowed by the self-important bond vigilantes will open the door further to populist parties.

At present, UK 10-year gilts yield 4.4%. This is not high by past standards: it only feels high because of 15 years of ultra-low rate policy. True, it is high enough that rising interest costs puts even more strain on public finances, which makes the challenge even greater. But what compensation does it offer for, say, the inflationary risk of a future government in five years’ time with a populist mandate to spend and willingness to be radical? Very little.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

MoneyWeek has, in its quarter-century of existence, built up a pretty good record for calling the major economic trends in the economy and society, and explaining what they mean for savers and investors (see this issue, passim). We are the bestselling financial weekly in the country for a reason, after all. But how do we do it? Ours is an age of scientism, so you could be forgiven for thinking that our procedure must be one that follows the tried-and-tested methods of natural science. If our writers were worried about the likelihood of a financial crisis in late 2007, as they were, while the consensus was saying that such things belonged to the past thanks to The Science, presumably that was because they had pored over the economic data, got themselves dusty in the British Library studying the latest economics and social-science papers, solved complex mathematical equations to show that the line now going up was about to hit a maximum and turn back down – or at least something along those lines.

What would the alternative be? Well, as Ayn Rand always used to insist, if we’re going to have a rational conversation and method at all, we’re going to have to take a look at our premises first. There’s no point looking at the data if we’re not first of all sure it is telling us something meaningful. No point looking at a speedometer if it’s not connected to the wheels or if you’re not interested in how fast you’re going. No point reading the social science if the writers of it are wrong-headed to begin with. There’s no point, in short, pretending that you know something when you don’t.

“The pretence of knowledge” was the title of Friedrich Hayek’s acceptance speech for the economics Nobel Prize in 1974. His message has not lost its relevance. He opens his lecture by admitting that his profession has made a mess of things (sound familiar?). The “serious threat of accelerating inflation” that was current at the time he spoke, in December 1974, had been “brought about by policies which the majority of economists recommended and even urged governments to pursue”. The fundamental source of the error, in Hayek’s view, was economists’ propensity to want to “imitate as closely as possible the procedures of the brilliantly successful physical sciences”.

That may sound reasonable, but actually the method is inappropriate because the study of complex phenomena in the social realm, such as the market, depends “on the action of many individuals” and all the circumstances that will determine the outcome will “hardly ever be fully known or measurable”. In the social sciences, often the factor that is treated as important is the one that is measurable, and the theories deemed admissible only those that refer to what is measurable. In other words, they are like the drunk looking for his keys by the lamp post, not because that’s where he lost them, but because that’s where the light is.

But we can bring light into the darkness using other methods than those of the physical sciences. One might, as Hayek says, build up “fairly good qualitative knowledge” of social phenomena, the conditions under which they appear, and the factors important in bringing them about or that would have to change to bring about an adjustment, that relies on the “facts of everyday experience”. Knowledge would then rely upon whether we can win general assent to what the facts are and on the “logical correctness of the conclusions drawn from them”. Those words will strike anyone who has read him as a pretty good summary of Ludwig von Mises’s approach in his monumental Human Action. Hayek was highly influenced by Mises. Together they are considered, along with a number of other figures, as the leading lights of the Austrian school of economics.

What is the Austrian school of economics?

This school of thought was founded in 1871 with the publication of Principles of Economics by Carl Menger, who, together with William Stanley Jevons and Leon Walras, were the leading figures in the “marginal revolution” in economics, as Peter Boettke explains at the Library of Economics and Liberty. Menger’s book was an attempt to “rescue theory” from the then-dominant German historical school, which argued that economic science cannot generate universal principles and that research should instead be focused on historical examination. Menger restated the view of classical political economy in “asserting economic laws that transcend time and national boundaries”.

The appropriate unit of analysis in this science, said Menger, is “man and his choices”. Those choices are determined by individual subjective preferences and “the margin on which decisions are made” (we would all prefer to do without diamonds rather than without water, but diamonds are usually more valuable than water because we decide what to value more highly not on the basis of total satisfaction, but at “the margin”, that is, on the basis of whether one additional diamond would give us more satisfaction than one more bucket of water). Hence “marginalism”. Those who held to these theories were dismissed as “the Austrian school” due to the positions the economists held at the University of Vienna, and the term stuck. Later economists taking the same basic approach were also dubbed “Austrians”.

Boettke’s essay goes on to list ten main propositions that define the Austrian school, and it’s as good a summary as you’ll find. Picking out just a few of them here should suffice to show why the teachings of the school have been helpful to MoneyWeek writers. The first proposition in Boetkke’s essay, for example, is that “only individuals choose”. “Man, with his purposes and plans, is the beginning of all economic analysis. Only individuals make choices; collective entities do not choose. The primary task of economic analysis is to make economic phenomena intelligible by basing it on individual purposes and plans; the secondary task of economic analysis is to trace out the unintended consequences of individual choices.”

That may or may not seem obvious, but it is a radical departure from the usual methods of social science. The starting point in Austrian economics is the individual and what he or she does with their mind – something opaque to the methods of natural science, but something we all know something about from introspection, and can build into reliable knowledge by tracing out the logical consequences of what is decided and how we act. Social science rather tries to understand how man is propelled to act by a myriad of social, historical and other forces, which the scientist tries to observe and measure as a physicist would in his laboratory with the aim of changing and controlling it where necessary (you can see why such an approach would be attractive to governments and other world-improvers).

The point here, though, is not to get into an intellectual dispute or to make metaphysical or political claims with which you may disagree, but to show the relevance of the Austrian school to investing, where a key plank of success is discriminating between what you as an individual do have some measure of control over (what you choose to pay in charges for fund management, for example) and what you do not really know or understand and have no control over anyway (whether the stock you are buying will rise or fall in price over the long term, or even survive, for example).

Intelligibility, not prediction

One thing that follows from this (proposition three in Boettke’s essay) is that the goal of Austrian economics – and of investing – is “intelligibility, not prediction”. We can achieve this “because we are what we study, or because we possess knowledge from within, whereas the natural sciences cannot pursue a goal of intelligibility because they rely on knowledge from without”. You can see the relevance of this to investing by considering the insights of John Kay and Mervyn King in Radical Uncertainty (reviewed in detail by MoneyWeek in 2021). In that book, the authors consider the phenomenon of “superforecasting”, which was all the rage at the time. But Kay and King point out that the future is not so much forecastable (the world is not a game of dice) as “radically uncertain”. It might, as the superforecasters say, be possible, by being open-minded and diligent, to do better than you might think at predicting whether inflation, say, will or will not be 3.5% by the end of the year, but this is at best a proxy for what we really want to know, which is “what is going on here”? During the Covid pandemic, MoneyWeek did not predict that inflation would hit a certain rate at a certain time. We did not know. But we did find what was happening intelligible, and hence concluded that the most likely consequence would be a period of prolonged and at least higher-than-usual inflation – again, at a time when The Science was assuring us that any effect would be “transitory”.

This leads us to proposition eight in Boettke’s list, and a key theme for MoneyWeek since its inception, which is that “money is non-neutral”. If government policy distorts the monetary unit, exchange will be distorted as well. Any increase in the money supply, for example, which is not offset by an increase in the demand for money, will lead to an increase in prices. But prices do not adjust instantaneously throughout the economy. Some price adjustments occur faster than others, which means that there are changes in relative prices. Each of these changes affects the pattern of exchange and production. Indeed, another key insight of the Austrian school is that it is artificially low interest rates – government meddling with the price of money – that cause boom-and-bust cycles. It was this kind of reasoning and not a crystal ball or the data that led MoneyWeek to warn of an impending crisis in 2007.

MoneyWeek has spent a great deal of its 25 years arguing along these lines – and warning of the economic and social consequences – and not just as an educational service, but to spell out what it means for investors: that positioning your portfolio to ensure your wealth grows at a rate at least to match and hopefully beat inflation is a key financial goal for all savers and investors, for example, and that some financial instruments and assets are more likely to achieve this goal than others.

It’s only fair to point out that adopting this outlook may not be very exciting. Having a tried-and-tested method for anticipating “what’s going on here” and investing sensibly as a result may well mean you miss out on the big boom in the latest thing and the profits that flow from that. Austrian-school investing is not a get-rich-quick scheme. But it might well protect you from some big mistakes – and avoiding the Big Loss, as our regular columnist Bill Bonner often points out, becomes ever more important to private investors as they get older and run out of time to make up the loss.

The Austrian school will not only protect you from mistakes in investing, but from all kinds of other political and intellectual errors, too. Those who have studied their work will know, for example, why socialism has never worked and never will. They will be sceptical about politicians’ promises to solve economic problems. They might get a clue, too, to the continuing success of MoneyWeek. The Austrian concept of the “disutility of labour” teaches that, all else being equal, individuals tend to prefer to economise on labour than not. By labouring to bring you these insights week in, week out, over the past 25 years, we have greatly reduced the amount of labour our readers need to put in to succeed as savers and investors. You’re welcome!

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What MoneyWeek got right

The commodities supercycle (Oct 2001)

Buy gold (Sep 2002)

The US housing bubble (March 2005)

The credit crunch (July 2007)

Sell the banks (Feb 2008)

Trump, Corbyn and populism (Sep 2015)

Post-Covid inflation (May 2020)

What MoneyWeek got wrong

We are all instinctively value-orientated (it tends to beat growth in the long term), and this meant we were often too sceptical of technology stocks. We said Google was overvalued at its flotation in 2004, when the share price was $85. Now it would be $2,330 if the stock hadn’t split in 2022. Being structurally bearish in view of the endless money printing, and central-bank interference in the business cycle, sometimes meant being insufficiently cyclically bullish over the years – that liquidity has to go somewhere, after all.

Columnist Max King has been a useful bullish corrective to our scepticism over the past decade or so. He is also sceptical when he needs to be, however: he rightly urged readers to get out of Neil Woodford’s Patient Capital Trust in early 2018.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

How has monetary policy shifted?

Over the past 25 years, monetary policy in advanced economies has undergone an astonishing, unprecedented transformation – dramatically changing in both scope and scale, and blurring the boundaries with fiscal policy. When MoneyWeek published its first edition, there was a broad consensus on inflation targeting, operational independence for central banks and faith in the ability of short-term interest rates to stabilise output and prices. But those turbulent 25 years have seen a radical shift. From the “Greenspan put” to quantitative easing (QE – printing money to buy government debt), monetary policy has evolved in ways that are highly controversial and politicised. Central banks today have vastly higher balance sheets, in some cases manage entire yield curves (that is, use policy to influence rates across different maturities of government bonds, not just short-term rates) and openly coordinate with fiscal authorities in emergencies.

Why is this controversial?

Because, critics argue, the gigantic balance sheets held by unelected central banks as the result of QE, and their “unconventional” monetary policies, have inflated asset-price bubbles, fostered inequality, led to misallocation of capital, and masked unsustainable public finances. Long-term, the chief purpose of monetary policy is to inspire confidence in the value of money by encouraging price stability. In the short or medium term, the aim of policy is to keep the real economy stable – supporting sustainable growth and employment – and to contain risks. Since the turn of the century, however, independent central banks have radically over-interpreted that brief by consistently coming to the rescue of equities and debt markets in ways that have distorted business cycles and deferred pain. Emergency measures have become the norm, and central banks have ballooned.

How have central banks expanded?

For almost the whole of the 20th century, the central-bank assets of advanced economies, as a proportion of economic output, remained remarkably constant, at around 10%-13% of GDP. But in the aftermath of the great financial crisis of 2007-2008 – as governments everywhere turned to QE – that proportion surged, rising above 20% in 2009-2010. And rather than falling back to normal levels as the crisis stabilised, that proportion then doubled once more during the 2010s to 40% – before spiking up to 70% in the aftermath of Covid. Even by 2024, it was still 50%. That’s a revolutionary change in the size of central banks’ financial assets within a couple of decades. Historically, balance sheets merely reflected operations. Now, they are strategic levers shaping long-term yields and risk premiums – a fundamental conceptual shift.

Was QE justified?

Yes, in the immediate aftermath of the financial crisis, decisive action by central banks was vital in stabilising economies and preventing deflation, says Andy Haldane in the Financial Times. By contrast, “later-stage QE, including purchases made in response to Covid, is harder to justify. With fiscal policy highly expansionary, QE’s primary purpose was to placate fretful bond markets rather than boost inflation” – a worrying step towards “fiscal dominance”. Vincent Reinhart, the chief economist at BNY Investments, co-authored two research papers on QE with Ben Bernanke, chairman of the Federal Reserve from 2006-2014, who instituted QE following the financial crisis. “We did not include a section on how to get out of the policy, or the risks stemming from it,” he now says. “That was a mistake – it was a lot stickier than I thought going in and has opened up a range of complications and potential political influences on monetary policy.”

So it’s been hard to get out of?

Indeed. The current era of gigantic public debt has blurred the lines between monetary and fiscal policy, since rate rises (or quantitative tightening) put up debt-servicing costs and infuriate the likes of Donald Trump. In the UK, quantitative tightening triggers indemnities that require the Treasury – ultimately, the taxpayer – to cover central-bank losses. In addition, by pushing up gilt yields, it makes it more expensive to the Treasury to borrow and service its debts. That makes monetary policy more politically charged than ever, and the target of populists who regard central bankers as sources of unelected and illegitimate technocratic power.

What are the limits on monetary policy?

Conventional monetary policy is a famously blunt tool. It has become blunter in recent decades. Financial globalisation and the absorption of China into the global economy, technological change and demographic ageing have lowered real rates. There’s been a relative decline in floating rate debt, meaning rate changes do not necessarily feed through into the wider economy. And rate-sensitive capital-intensive sectors, such as manufacturing and construction, have diminished in favour of services, which are more labour-intensive and less responsive to interest rates, says Marco Casiraghi, director at Evercore ISI. All of this makes monetary policy harder to frame and execute with confidence.

A tough gig, then?

The Bank for International Settlements says that everyone, from governments to central banks to investors and consumers, needs to become more realistic about monetary policy. The idea that it alone can underpin growth is an “illusion”. And the trade-offs that monetary policy involves will “become unmanageable” without “more holistic and coherent policy frameworks in which other policies – prudential, fiscal or structural – play their part”. Central bankers may be even more powerful than 25 years ago. But in an ever more complex and turbulent century, even they recognise that they are not magicians.

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Sometimes an idea is so catchy that it doesn’t matter whether it’s true. The “debasement trade” – the claim that investors are starting to price in a severe surge in inflation that will erode the value of money – is a good example. We see it everywhere in headlines at the moment. Yet it’s impossible to see much evidence in markets. To begin with, we have to agree on what is being debased. The US dollar is the favoured target. However, if you look at the dollar versus other major currencies, there is no sign of this happening. Yes, it is down since the start of the year, and still seems more likely to fall than rise against over the next few years if foreign sentiment towards US assets continues to cool. But it has been stable since June. We’re not even seeing weakness now, let alone debasement.

Maybe the debasement is in all fiat currencies, so they won’t fall against each other because they are all equally bad. Instead, they will weaken against real assets. The surge in gold and other precious metals seems to support this. Yet stocks are also doing well, even though they typically struggle in high inflation (they often rise during hyperinflation, but that is a different scenario). More likely, traders are latching onto gold because it’s been going up: record flows into gold exchange-traded funds (ETFs) support this idea. A few months ago, I noted that we were not seeing these flows – now it has changed.

Bond yields and the debasement trade

If markets were genuinely becoming much more worried about inflation, we’d expect to see it in bond yields. While many yields have risen this year – especially longer-term government bonds – this always felt more like markets were pricing long-term uncertainty about government policy and finances, not specifically forecasting inflation. It continues to look that way.

Yields have mostly come down in the last few weeks. Even more significantly, inflation breakevens – the difference between the yields on a conventional bond and an inflation-linked one of the same maturity – are not rising (see above). Breakevens are not a good forecast of inflation, but if markets are functioning normally, they will express fear of inflation through nominal yields that rise faster than inflation-linked ones and thus through widening breakevens.

Of course, we may well see high inflation if governments run large deficits while forcing central banks to cut rates and control yields. But it’s wrong to claim the market’s watchdogs are sounding the alarm. They are clearly not – yet.

What to do if inflation surges will be on the agenda at Turmoil, Tariffs and Trump 2.0, the MoneyWeek Wealth Summit, on Friday, 7 November in London. Our morning keynote speaker, Dylan Grice, will discuss the difficulties of investing in this “high-signal” environment, while our multi-asset panel of Charlie Morris (ByteTree), Charlotte Yonge (Troy), Frank Ducomble (RIT) and Jasmine Yeo (Ruffer) will share ideas on how to hedge the risks. See moneyweekwealthsummit.co.uk for details.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

Summary

• Inflation came in at 3.8% for September, below analyst estimates of 4%.
• The Bank of England’s monetary policy committee has been keeping a close eye on this year’s persistent inflation, with many analysts suggesting stubborn inflation eliminates any chance of another base rate cut in November.
• The Bank of England expects September’s read to be the peak, and for inflation to slow down through the rest of 2025 and 2026.

| What is inflation? | CPI vs RPI inflation | When will interest rates fall further? | CPI release dates | MPC meeting dates |

What to expect from the latest inflation reading

Analysts widely anticipate that September’s report, released tomorrow, will show a climb from August’s inflation reading of 3.8%.

The Bank of England and Oxford Economics have said a 4% CPI for September is likely. September.

If their assumptions turn out to be correct, then this puts September's figure at the highest level of inflation in 22 months. The last time inflation was this high was December 2023, when it hit 4%.

Other forecasters are a little more optimistic, but not by much. Deutsche Bank analysts expect inflation to come in at 3.9% in September.

ONS to publish September inflation reading at 7am tomorrow (22 October)

Good afternoon, and welcome to our live coverage of September’s inflation figures.

This month’s inflation release will be published by the Office for National Statistics (ONS) tomorrow morning at 7am.

In the lead up to the release we’ll cover the latest estimates, analysis, and break the news tomorrow morning.

What is inflation?

Put simply, inflation is the rate at which prices increase within an economy over a given period of time.

If, for example, you bought an apple for £1 in 2024, but by 2025 the price of that apple was £1.10, the annual rate of inflation will have been 10%.

The most common way of expressing the rate of inflation is through the Consumer Prices Index (CPI), which measures the increases in price of a basket of goods, but excludes housing costs.

Measuring inflation is important because it can tell you how the spending power of your money has changed over time, and can indicate what the value of your money is in real terms.

What high inflation means for mortgages

Higher inflation is a worry for those looking to secure a mortgage. With prices still very much rising, the cost of living stretches affordability calculations.

Couple this with the ongoing freeze on income tax thresholds – where more people find themselves dragged into higher tax brackets as their wages rise – and household budgets remain under pressure when it comes to borrowing big sums.

“Persistent inflation can dent affordability and reduce borrowing power for mortgaged homeowners and first-time buyers, making it harder to secure a mortgage or move up the property ladder,” says Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, an online investment platform.

Buying a home is already more expensive after stamp duty thresholds reverted to their previous lower level in April and with speculation mounting that Reeves may unveil a fresh round of property taxes at her Budget in November, uncertainty is growing.

Stubbornly high inflation also means further interest rate cuts – and so mortgage rate cuts – are likely to come more slowly.

“While affordability has improved in recent months – thanks to lower mortgage rates, more relaxed stress test rules from lenders and more realistic pricing from sellers – shifting interest rate expectations mean that rates may not fall as fast as hoped,” says Haine.

Those coming off short-term fixes, secured during the peak post-pandemic rate period may find better deals now.

But borrowers nearing the end of ultra-low, long-term fixes taken before rates began their rapid ascent in December 2021 could face a sharp rise in monthly repayments, unless they’ve significantly reduced their outstanding balance.

– Laura Miller, Online Writer

What is driving inflation?

For the past months, inflation has remained far higher than the Bank of England’s target of 2%. A multitude of factors are to blame for this, but food inflation has been particularly sticky for the past year.

In August, the last month for which data is available, food inflation reached 5.1%, up from July’s level of 4.9%. It was the fifth month in a row when food inflation increased.

Beyond just its economic effects, food inflation is also particularly significant because it is the main way that price rises manifest themselves to consumers – it is very easy to see when your weekly shop becomes more expensive.

This is doubly concerning for the Bank of England as higher food costs are more visible to employees who may then use them to justify larger pay increases, leading to even more inflation.

What high inflation means for savers

Inflation erodes the spending power of our savings. So finding a place to put your money where the interest you get beats inflation is key – but becoming trickier as inflation stays high and interest rates fall.

The average savings rate was 3.44% as of 17 October, according to the latest Moneyfacts data. It wasn’t so long ago savers were enjoying average rates of around 5%.

Savings rates have dropped off over the past year as the Bank of England has cut the Base Rate five times since August 2024. The most recent cut, in August 2025, brought the rate down to its present level of 4% from a high of 5.25% in 2023/24.

While a flat inflation rate may slow the pace at which the top savings deals disappear – on the basis further Bank of England interest rate cuts get delayed – the downside is high inflation erodes the real value of returns.

“With savings rates on a general downwards path, shopping around for the best deals available is imperative for those hoping for an inflation-beating return, with some of the best deals remaining competitive compared to the long era of rock-bottom rates in the run-up to the pandemic,” says Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, an online investment platform.

However securing the best inflation-beating savings accounts is not without its own dangers. Tax on savings is another concern.

With the tax-free Personal Savings Allowance (PSA) thresholds frozen for the past nine years, more savers are breaching theirs, particularly higher-rate taxpayers who have a PSA of just £500. For additional rate taxpayers, the allowance is zero so they must pay tax on the first penny of interest they earn.

Using up a £20,000 ISA allowance or topping up a pension protects savings from tax on income and capital gains.

Recap: Where has inflation gone this year?

Inflation in 2025 started by falling from 3% in January to 2.6% in March, but price growth increased over the following five months.

A particularly large jump occurred in April when a deluge of consumer price increases occurred as the new financial year began, prompting inflation to rise 0.9% percentage points in just one month.

Since then, inflation has continued to increase, reaching 3.8% in July and August.

Inflation outlook: Things can only get better?

With inflation being widely expected to reach 4% in September, consumers will be bracing for heightened prices across the country.

But there is a light at the end of the tunnel. September’s reading of 4% is expected to be the highest reading for quite some time.

Forecasts by the Bank of England anticipate that inflation will fall soon after a 4% reading in September, with price growth averaging 3.75% in the second half of 2025 overall, and falling further in the new year.

By the third quarter of 2026, the central bank believes inflation will be 2.7%, and then expects inflation will return to the 2% target by the second quarter of 2027.

A sustained fall in inflation after September is also expected by Deutsche Bank who believe inflation will slow to 3.6% over the last three months of 2025.

Meanwhile, the median expected inflation reading for the last quarter of 2025 by economists surveyed by the Treasury on 17 September was 3.6%, and 2.3% for Q4 2026.

This being said, a sustained fall in inflation in 2026 is contingent on there being no significant inflationary economic shocks.

Thank you for tuning into our inflation live report this evening. We will be back tomorrow morning when September’s inflation figures are published at 7am. Join us then for the latest news and analysis.

Good morning, and welcome back to our live coverage of today’s inflation CPI release. The latest inflation figures should be published by ONS in around half an hour.

To recap, prior forecasts expect annual CPI inflation to have risen to 4% in the year to September, but that this will mark the peak for the current wave of inflation and that the pace of price increases will start to slow going into the end of this year.

Mind the inflation gap

Assuming that today’s CPI read comes in at or near the expected 4% level, it will see UK inflation running at around double the rate in the European Union.

While some of this divide is explained by distortions from price caps, as well as higher energy and food prices in the UK, Micheal Field, chief equity strategist at Morningstar, says that “the concern from investors is that there is a structural gap now, driven by a dearth of labour supply and increased trade barriers generated by Brexit”.

This gap hasn’t perturbed equity markets, for now at least. “UK equity markets are trading close to all time-highs, unperturbed for now by inflationary concerns,” says Field. “How long this confidence and long-term thinking lasts for is likely to depend on how quickly inflation falls from here.”

Breaking: UK inflation held steady at 3.8% in September

The inflation read for September has been published, and the headline figure is that UK CPI inflation was unchanged at 3.8% over the preceding 12 months, coming in below analyst expectations.

September inflation read surprises to the downside

This is a surprising result, with many analysts – including the Bank of England – having expected inflation to hit its highest level for 22 months during September.

“A variety of price movements meant inflation was unchanged overall in September,” said Grant Fitzner, ONS’s chief economist. “The largest upward drivers came from petrol prices and airfares, where the fall in prices eased in comparison to last year.”

These increases were offset by lower prices for recreational and cultural purchases, such as live events. “The cost of food and non-alcoholic drinks also fell for the first time since May last year,” said Fitzner.

Reeves responds to inflation read

While the unchanged inflation read is in some respects positive news, chancellor of the exchequer Rachel Reeves has been quick to declare herself "not satisfied with these numbers".

Reeves said that "for too long, our economy has felt stuck, with people feeling like they are putting in more and getting less out. That needs to change." She also highlighted government's collective responsibility for supporting the Bank of England in lowering inflation and supporting those struggling with cost of living challenges.

Transport the main driver behind September inflation numbers

The outsized impact of the transport sector on the September inflation read is striking.

Transport contributed 0.19 percentage points to annual CPI inflation between August and September. The only other sectors that saw price increases were restaurants and hotels, and clothing and footwear, both contributing 0.02 percentage points to September CPI.

Most other sectors actually saw lower prices, including food and non-alcoholic beverages which contributed -0.06 percentage points to September CPI.

Relief for Reeves?

While UK chancellor Rachel Reeves has stated that she is not happy with persistent levels of inflation, she will no doubt be breathing a sigh of relief that today’s inflation figures have come in below expectations, as she struggles to invigorate economic growth without stoking inflation or riling the bond market.

“A surprise inflationary undershoot will spark relief all round,” said Nicholas Hyett, investment manager at Wealth Club. Despite prices rising at nearly twice the Bank of England’s target rate, he said, the prospect of any reversal of the current rate-cutting cycle seems off the cards as long as September’s read marks the inflation peak as expected.

“Fingers crossed, that leaves enough oxygen for the economy to pick up some momentum,” Hyett added.

He cautioned, though, that the upcoming Autumn Budget could upend this optimistic outlook. “We just hope the government doesn't manage to repeat last year's trick in November by carefully selecting tax increases that could have been designed to return the UK to inflationary purgatory,” he said.

Core and Services inflation surprises could see a December rate cut

The headline figure as far as most consumers are concerned is the CPI figure of 3.8%, but there are several other metrics that Bank of England rate-setters will look at optimistically from today’s read.

Core CPI – which strips out more volatile categories like food, energy and tobacco – fell to 3.5% in the 12 months to September, from 3.6% in August. CPI Services inflation was unchanged at 4.7%. Both these metrics were below analyst expectations.

“All of the Bank of England’s preferred core services measures slipped in September highlighting a more broad-based fall in price momentum,” said Sanjay Raja, chief UK economist at Deutsche Bank.

“Big picture, the odds of a Q4-25 rate cut have risen on the back of today’s data. With two additional CPI prints to watch, and two further labour market reports to come before the December meeting, we think there will be enough ammunition for the MPC to ease rates further,” said Raja. “With chancellor Reeves laying the groundwork for lowering the cost of living in the upcoming Budget, we continue to think that a December rate cut is very much in play.”

Inside transport cost inflation

Transport was the greatest upward driver in September’s CPI report, largely driven by fuel and air fare prices.

Confusingly, though, these costs fell between August and September – but at a lower rate than they did at the equivalent period last year.

Petrol prices fell on average 0.2 pence per litre between August and September 2025, compared with a fall of 5.5 pence per litre during the same period in 2024. The average price stood at 134.0 pence per litre in September 2025, down from 136.8 pence per litre a year earlier.

Air fares fell by 28.8% between August and September 2025, a significant drop: in fact, this was the third-largest decrease in September air fares since the collection of airfares changed from quarterly to monthly in 2001. But it comes on the back of the largest period in that timeframe, a 34.8% decrease during the same period last year.

So transport costs have acted to push year-on-year CPI upwards in September, despite prices having fallen during the month.

HL: Some investors expecting more interest rate cuts after inflation reading, but market may have overreacted

Today’s lower-than-expected inflation figures have reinforced a view held by some investors that the Bank of England could cut interest rates more than previously thought over the last 12 months, according to Hal Cook, senior investment analyst at Hargreaves Lansdown.

This view had started to gain traction even before today’s inflation figures and was bolstered by soft labour market statistics published on 14 October which showed unemployment increased to 4.8% in August.

With today’s inflation surprise, “investors' demand for UK government bonds (gilts) has remained strong, causing yields to fall further,” says Cook.

“The yield on the 10-year gilts has fallen to around 4.42% today (their lowest level since December 2024), having been as high as 4.75% as recently as 9 October, reflecting investors expectations of rate cuts increasing. Swaps markets are now pricing in a 60% probability of a rate cut ahead of year end, up from 40% yesterday. The Monetary Policy Committee next meets on 6 November to discuss interest rates.”

Despite some investors’ bullishness, Cook adds that the house view at Hargreaves Lansdown is that the market overreacted this morning: “inflation at 3.8% is still nearly double the Bank of England target and Andrew Bailey has been clear that future rate cuts will be made in a considered fashion and data driven. He hasn’t appeared to be in a rush to cut so far.

“There is also a risk that the upcoming Budget towards the end of November could change things. It’s therefore unclear whether the Bank of England will look to cut at their next meeting or wait to see what comes out of the Budget before cutting further – remember that they have already cut rates three times in 2025, taking them from 4.75% at the start of the year to 4% today. While a cut in November is more likely after this latest inflation data, it’s by no means guaranteed.”

September inflation is ‘small glimmer of hope’ for Reeves, but celebration muted

With all eyes starting to look towards chancellor Rachel Reeves in the run-up to her second Budget, this month’s inflation figures offer her a small comfort, according to Chris Beauchamp, chief market analyst at IG.

"While still almost double the BoE's target, news of inflation holding steady provides a small glimmer of hope for the chancellor ahead of next month's Budget. Core CPI even slowed for a second month, though policymakers will have to wait a little longer before making a bet that price growth has peaked."

But celebration of September’s inflation reading will be muted. The last time before July that price growth was above 3.8% was January 2024, meaning the UK has still experienced July's 18-month high inflation for the last three months.

Kevin Brown, savings specialist at Scottish Friendly, said: “On paper a flat inflation reading is to be welcomed. But in the real world, many families are still struggling to make ends meet after three years of blistering price increases.

“As a double blow, September’s inflation reading will probably not be enough to persuade the Monetary Policy Committee (MPC) to reduce borrowing costs again this year. Policymakers will want to see clear evidence that inflation is heading back towards their 2% target before acting, which means another rate cut this year remains unlikely.

“That’s a blow for borrowers hoping for mortgage rates to come down further. As for savers, the best course of action now is to shop around for the best possible deals to ensure that their money is working as hard as it could be or consider longer-term investments that can often offer stronger protection against inflation.”

Consumers urged not to be complacent and move savings to inflation-beating accounts

With inflation remaining much higher than the Bank of England’s target, savers have been urged not to let their savings slowly erode away in low interest rates accounts.

There is around £570 billion sitting in current and savings accounts earning less than 1.5% interest, according to research by Spring Savings, a part of Paragon Bank.

That means millions of savers are missing out on inflation-busting interest rates if they don’t switch accounts.

Derek Sprawling, head of money at Spring Savings, said: “With inflation holding steady, the message is clear: stability doesn’t equal relief. Prices remain high, and the gap between inflation and savings returns continues to hurt consumers. At Spring, we’re urging savers not to be complacent.

“Switching from a sub-1.5% account to a more competitive rate can make a meaningful difference over time. It’s about taking control of your savings, not waiting for the market to move. With £570 billion sitting in current and savings accounts earning less than 1.5%, the scale of missed opportunity is staggering.”

Retirees set for a £550 boost to the state pension next year

Today’s September inflation report is always a closely watched measure by those in receipt of the state pension because it can determine their income for the following year.

The triple lock guarantees that the state pension grows each April by the highest of either average annual earnings growth, including bonuses, from May to July, CPI inflation in the year to September, or 2.5%.

As we now have figures for both earnings growth and inflation, we know that the earnings growth data for May to July will be the determining factor.

Average total pay growth is now confirmed at 4.8% in the May to July period, and we now know inflation in the year to September has totalled 3.5%.

This means pensioners on the new state pension will enjoy a healthy annual uplift of over

£550 to their retirement income next April, tipping their total annual payment just above the £12,500 mark.

“The sting in the tail comes from frozen income tax thresholds,” says Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, an online investment platform. “With the personal allowance remaining at £12,570, it means the new state pension will be just shy of the point at which pensioners must pay tax on the benefit.”

Retirees already receiving a higher state pension may already be paying tax on their state pension, so a further uplift will drag them deeper into taxable territory.

“As winter approaches, one small comfort for pensioners earning £35,000 or less is the reinstatement of the winter fuel payment following the government’s policy U-turn in June,” Haine says.

However, next year’s state pension uplift could push some retirees above the £35,000 threshold, making them ineligible for the winter fuel payment and cancelling out some of the gain from a higher state pension payment.

– Laura Miller, Online Writer

Food inflation fell for the first time since March

One of the most closely-watched aspects of the monthly inflation figures is how much food and non-alcoholic beverages have increased in price.

Food inflation has been sticky for the past few months, having consistently risen since March and remained above the headline CPI figure.

But in a relief to many across the country, food inflation fell for the first time since March in September.

The 12-month inflation rate for food and non-alcoholic beverages was 4.5% this month, down from 5.1% in August, 4.9% in July, and 4.5% in June.

Moreover, September was the first time since May 2024 that month-on-month food inflation fell, being down by 0.2% from August 2025.

Downward contributions came from five of the eleven food and non-alcoholic beverages classes recorded by the ONS, namely:

• Vegetables
• Milk, cheese and eggs (particularly cheese)
• Bread and cereals
• Fish
• Mineral waters, soft drinks, and juices

The ONS says slowing food inflation in September was likely to have been driven in part by sales and discounting increasing at a greater rate into September 2025 than into September 2024.

Oxford Economics: Inflation at near-term peak

September’s inflation reading of 3.8% looks set to be the highest for some time as forecasts believe price growth will trend downwards for the foreseeable future, bringing a gradual end to this year’s bout of increased inflation.

Edward Allenby, senior UK economist at consultancy Oxford Economics, said: “We think inflation is at its near-term peak. The positive contribution from the energy category should drop from October, with this year's rise in the energy price cap being much smaller than last year's increase.

“The impact of stronger sterling and weaker wholesale prices should start to weigh on food price inflation around the turn of the year. But the path to softer services inflation is likely to prove more gradual, as pay growth cools steadily, the impact of firms passing on this year's increase in employers' national insurance contributions slowly fades, and base effects from regulated price changes only come into play in the spring.”

Before today’s data was published, Oxford Economics forecast inflation would be 3.9% in September. Thanks to the fractionally lower official figure, the consultancy says its near-term inflation forecast has been nudged down slightly, but they still expect CPI inflation to average 2.8% in 2026.

Peel Hunt: ‘Almost no chance’ of two more base rate cuts this year

Members of the Bank of England’s Monetary Policy Committee (MPC) will be closely monitoring today’s inflation release as they consider its impact on the trajectory of interest rate cuts.

The MPC will meet twice more before the end of 2025 (6 November, 18 December), but investor consensus is that additional base rate cuts seem unlikely this year.

This being said, Peel Hunt Economics says September’s inflation figures do mean that the two remaining 2025 MPC meetings are less of a foregone conclusion than initially thought.

Kallum Pickering, chief economist at Peel Hunt Economics, said: “Today's less-bad-than-expected inflation increases the hope that the BoE may cut again in 2025 – but a lot depends upon incoming economic data over the next few weeks.

“While we put almost no chance on two cuts in the final two BoE meetings of the year both meetings are increasingly 'live' and could involve a cut in the bank rate from its current 4.0%.”

“Note that the BoE cannot pre-empt what policies the government will announce at the 26 November budget, and hence any cut as soon as 6 November could only come on the back of policymakers' updated assessment that recent data trends point to a faster-than-expected disinflation. The December meeting, however, is a different question – by then policymakers could factor in any disinflationary policy announcements coming from the budget.”

Thank you for joining us for our live coverage of September's inflation report.

Join us again in just under a month's time when we will be bringing you the latest news and analysis for October's report, which will be published on 19 November.

Summary

• Inflation held steady at 3.8% in August, marking no change compared to July's report.
• It is likely to be a brief hiatus, with price rises forecast to hit 4% when September's report is published next month.
• The latest reading of 3.8% is in line with what the Bank of England had forecast. Some economists had predicted a slight increase to 3.9%.
• Easing pressure from airfares helped, with prices rising by less than a year ago. This was offset by upward contributions from restaurants & hotels and motor fuels.
• The Bank of England’s next interest rate decision will be announced tomorrow. Policymakers are expected to keep rates on hold at 4%.
• The Bank’s governor Andrew Bailey recently said that inflation risks had “gone up”, casting “considerably more doubt” on the timing of future rate cuts.
• After peaking in September, inflation is expected to gradually cool, before finally returning to the 2% target in the second quarter of 2027, according to the Bank of England’s forecasts.

| What is inflation? | CPI vs RPI inflation | When will interest rates fall further? | CPI release dates | MPC meeting dates |

What to expect from tomorrow’s inflation report

Good afternoon and welcome to our inflation live coverage.

The Office for National Statistics will publish August’s inflation report tomorrow morning at 7am, and it is unlikely to make pretty reading. Forecasters think inflation will either hold steady at 3.8% or creep up slightly to 3.9%, before peaking at 4% next month when September’s figures are released.

July’s reading of 3.8%, published last month, was the highest in 18 months. Higher food prices have been a big driver of increases in recent months.

Oxford Economics: Food and petrol could push inflation higher

Advisory firm Oxford Economics is one of the forecasters that thinks inflation will inch up to 3.9% tomorrow. By comparison, the Bank of England’s forecasts point to a 3.8% reading, which is also what Deutsche Bank, the investment bank, is expecting.

A 3.9% forecast “reflects our view that further upward pressure from food prices and a smaller drag from the petrol category should more than offset the impact of a modest fall in services inflation due to July's temporary spike in air fares unwinding,” said Edward Allenby, economist at Oxford Economics.

Experts say September rate cut unlikely

The next Monetary Policy Committee (MPC) meeting will take place on 18 September, just one day after August’s inflation report is published. The Bank of England is expected to hold rates at 4%. Economists polled by Bloomberg and Reuters were unanimous in ruling out a September rate cut.

Speaking to MPs earlier this month, the Bank of England’s governor Andrew Bailey said inflation risks had “gone up”. While rates are still on a downward path, he added that there is now “considerably more doubt about exactly when and how quickly we can take those further steps”.

Oasis reunion tour could push hotel prices up

Hotel prices jumped in July, partly off the back of the Oasis reunion tour. This could add pressure in August too, with the concerts continuing into the month. Pantheon Macroeconomics thinks this, combined with other factors like higher food price inflation, will push the headline figure up to 3.9%.

“A jump in food price inflation, a fall in motor fuels last August dropping out of the annual inflation comparison, and hotel prices inflated by an Oasis concert on CPI collection day should more than offset slowing airfare inflation,” said Pantheon’s chief UK economist Robert Wood.

State pensioners more interested in September CPI report

It is August’s inflation figures that we will get tomorrow. Pensioners will have to wait another month for September’s figures (due on 22 October), which will play a role in setting how much state pension they receive in 2026/27.

Under the triple lock policy, state pension payments are uprated annually in line with inflation, earnings growth, or by 2.5% – whichever measure is highest.

September’s CPI report is the one that is used in the calculation. The wage growth figures used cover the period between May and July. These were published in today’s labour market report.

This year’s triple lock calculation will almost certainly be based on earnings growth, as this came in at 4.7% between May and July (including bonuses), whereas September’s inflation reading is expected to come in at 4%.

A 4.7% increase “would see a full new state pension rise from its current level of £230.25 per week to £241.05 per week from April,” said Helen Morrissey, head of retirement analysis at investment platform Hargreaves Lansdown.

“Those retiring on the basic state pension would see their weekly income increase from £176.45 per week to £184.75.”

See also: When will I pay tax on my state pension?

Households brace for impact of inflation

More than four in five people (83%) expect inflation to hit their personal finances in the next five years, according to research from Yorkshire Building Society. One of the most damaging effects of inflation is the way it can erode your savings.

Even if inflation were to sit at around 2% (the Bank of England’s target), it would only take 36 years for the value of your savings to halve.

Over the past few years, the rate of inflation has been far higher than this; UK inflation peaked at 11.1% in October 2022. At this elevated level, it would only take around six and a half years for the value of your money to halve.

While investing can be a good way to beat inflation over the long run, we all need to hold a decent amount of cash for day-to-day spending, short-term savings goals and emergencies.

One of the best ways to protect the value of your cash is to find a savings account that offers real returns. Although this is becoming more difficult (as interest rates have come down while inflation has gone up), there are still inflation-busting rates on the market.

Analysis from Moneyfacts, conducted last month, showed 956 accounts were still offering inflation-beating rates in August.

See our round-up of the best easy-access rates, one-year savings accounts, regular saver accounts and cash ISAs for the latest deals on cash savings.

When will inflation return to the 2% target?

As we have introduced in our previous posts, inflation is expected to peak at 4% in September’s report (published in October) before gradually falling back after that. It could be some time before it returns to the 2% target, though.

Bank of England policymakers believe inflation will average 3.1% in the first quarter of 2026, 3% in the second, 2.7% in the third and 2.5% in the fourth.

They expect it to return to the 2% target in the second quarter of 2027.

What’s happening with food inflation?

Food has been one of the categories driving inflation higher, and it is an area the Bank of England seems to be concerned about. Food prices are very visible to consumers – it is easy to see when your weekly or monthly supermarket bill is going up.

One thing the Bank is worried about is that this will translate into higher household inflation expectations, which could prompt people to bargain for bigger wage increases. It is a vicious circle, because pay rises themselves are a big driver of future inflation. The Bank needs wage growth to come down before it can cut interest rates much further.

In July’s report, the cost of food and non-alcoholic beverages rose by 4.9% – the fourth consecutive increase in the annual rate and the highest recorded since February 2024.

“The Food and Drink Federation is forecasting food inflation could reach 5.7% by the end of December and still be running at 3.1% by the end of 2026,” said Susannah Streeter, head of money and markets at Hargreaves Lansdown.

“Higher employer and packaging taxes are being blamed for increasing costs for companies, which they can no longer absorb.”

Thank you for following our preview analysis this evening. We will be back tomorrow morning when August's inflation figures are published at 7am. Join us for live reporting and analysis then.

Good morning – what to expect from August’s inflation report

Good morning and welcome back to our live inflation coverage. August’s CPI report will be published in less than half an hour. To recap: forecasters are expecting inflation to either hold steady at 3.8%, or creep up slightly to 3.9%. Stick with us as we bring you the latest news and analysis.

Explainer: What is inflation and how does it affect you?

You will have heard a lot about inflation over the past four years. It refers to how much the cost of goods and services is going up. Put simply, if you spent £1 on a product this time last year and annual inflation now stood at 10%, that same product would be likely to cost £1.10.

Economists believe having some inflation – a target level of 2% – is a sign of a healthy economy because it encourages spending and means GDP can grow. However, too much inflation can be harmful to living standards, as we have seen through the cost-of-living crisis.

At 3.8% (July's inflation reading), prices are currently rising at almost double the Bank of England’s target rate, which is why interest rates are very unlikely to be cut tomorrow.

Interested in learning more? See our full inflation explainer.

The path of inflation

After slowing considerably from its peak of 11.1% in 2022, inflation has been heating up again in recent months.

BREAKING: Inflation holds steady at 3.8%

Inflation held steady at 3.8% in August, marking no change compared to July. This is in line with what the Bank of England had forecast.

Easing pressure from airfares

Airfares made the largest downward contribution to the monthly change in CPI, according to the Office for National Statistics (ONS), while restaurants & hotels and motor fuels added upward pressure.

Airfares rose by 2.1% between July and August 2025, compared with a rise of 22.2% between the same months in 2024.

The smaller monthly change this year can be explained by July's high index level. There was a large spike in airfares in last month's report, partly explained by the timing of school holidays in 2025 versus 2024.

Fuel prices rose this August after falling a year ago

Fuel prices added upward pressure to August's inflation reading, rising on a monthly basis this year after having fallen a year ago.

The average price of petrol rose by 0.3 pence per litre between July and August 2025, compared with a fall of 2.1 pence a year ago.

Similarly, the price of diesel rose by 0.8 pence per litre in August 2025, compared with a fall of 2.6 pence a year ago.

Supersonic hotel demand from Oasis concert?

Hotel and restaurant costs rose by 3.8% on an annual basis in August, up from 3.4% in July. The Oasis reunion tour may have been partly to blame, with index collection day falling on 12 August this month. One of the Edinburgh gigs took place that day, suggesting fans may have been looking for places to stay overnight.

Food inflation rises for fifth consecutive month

Food inflation has been coming in hot in recent months, and August's report showed a fifth consecutive increase in this category.

The cost of food and non-alcoholic beverages rose by 5.1% on an annual basis in August, up from 4.9% in July.

Vegetables, milk, cheese, eggs and fish all added upward pressure. This was partially offset by small downward effects from bread, cereals, oils and fats.

Rachel Reeves: "I know families are finding it tough"

Chancellor Rachel Reeves responded to this month's inflation report by acknowledging the challenges faced by many households as cost pressures pick up again.

She said: "I know families are finding it tough and that for many the economy feels stuck. That's why I’m determined to bring costs down and support people who are facing higher bills.

"Through our Plan for Change we are taking action – raising the National Living Wage, extending the £3 bus fare cap, and expanding free school meals, to put more money in people's pockets while we work to build a stronger, more stable economy that rewards hard work."

Little relief for struggling households

Although a pause in the ascent of the inflation rate is better news than an acceleration, many will be bracing themselves for next month. September’s report (due on 22 October) is expected to show a reading of 4%.

This month’s report will offer “little relief for cash-strapped households still grappling with overstretched budgets,” said Alice Haine, personal finance analyst at investment platform Bestinvest.

She added: “Stubborn inflation is worrying for consumers as it means prices are still very much on the rise – they are just increasing at the same pace as the previous month.

“Add to that the extended freeze on income tax thresholds, where more people find themselves dragged into higher tax brackets as their wages rise, and household budgets will continue to feel stretched.”

Haine explains that building a strong financial foundation is key to navigating economic uncertainty. Tips she shares include:

• Living within your means
• Delaying big-ticket purchases
• Cancelling unused subscriptions
• Cutting non-essential spending
• Shifting expensive debts to a 0% balance transfer credit card
• Building up emergency savings to cover three to six months of essential expenses

Also see: How much should I have in emergency savings?

Slowdown in core and services inflation

One positive development within August’s report is that both core and services inflation slowed compared to July. Core CPI came in at 3.6%, down from 3.8% previously. Services CPI came in at 4.7%, down from 5%.

Core inflation strips out categories that tend to see short, sharp fluctuations in prices, like food and energy, making it a good indicator of how embedded price pressures have become.

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.

“Slowing services and core inflation offers a rare silver lining as it suggests that underlying price pressures are becoming less sticky,” said Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales.

“The squeeze from a cooling jobs market should help keep it on a downward path.”

Encouraging report today – but BoE will want to see more of the same

Deutsche Bank, the investment bank, said today’s inflation data would be seen as “a positive for markets – even, perhaps, encouraging”. However, the Bank of England will want to see more evidence that inflation is coming under control before cutting interest rates again. Remember that policymakers think inflation will peak at 4% in the next report.

“This is why we continue to see a slightly longer pause when it comes to the Bank’s next rate move,” said Sanjay Raja, Deutsche Bank’s chief UK economist. He doesn’t think the Monetary Policy Committee (MPC) will trim rates again until December.

“For us, the MPC may want to wait for a larger accumulation of evidence before dialling down restrictive policy again,” he added. “Seeing the downtrend in CPI begin could assuage fears on the committee that the hump in inflation is not turning into a plateau.”

“Tug of war within Threadneedle Street”

Tomorrow’s meeting at the Bank of England looks close to a foregone conclusion. Economists polled by Reuters and Bloomberg unanimously said they expect rates to be kept on hold at 4%. We could see a 7-2 voting split, with only MPC doves Swati Dhingra and Alan Taylor voting for a cut.

If this forecast materialises, it would be a decisive outcome but, longer term, the votes may become more scattered. We have seen some division among committee members in recent meetings, including in August, where two votes were required before a 5-4 split was achieved.

Looking beyond September’s meeting, “the inflation outlook has triggered a tug of war within Threadneedle Street,” said Rob Morgan, chief investment analyst at wealth management firm Charles Stanley.

“Some MPC members argue that signs of weakening demand and softening price pressures justify another rate cut before year-end, continuing the Bank’s ‘gradual and careful’ easing cycle,” he added. “However, the persistence of elevated inflation complicates that narrative.”

With CPI expected to come in at 4% in September, Morgan thinks the MPC could opt to hold rates steady at November’s meeting too. While GDP growth is “tepid”, it hasn’t slowed enough to confirm a decisive disinflationary trend, in his view.

“Little to cheer for mortgage borrowers”

Although expected, an inflation reading of 3.8% will still come as bad news to some mortgage borrowers. It will do little to dissuade the Monetary Policy Committee (MPC) from sounding a cautious note in its statement tomorrow.

A ‘hold’ decision is already priced in, but hawkish rhetoric could cause markets to become more cautious on the longer-term outlook for rate cuts, impacting mortgage pricing.

“Mortgage rates have edged up in recent weeks, as the rate outlook of ‘higher for longer’ has taken its toll on lenders’ funding,” said David Hollingworth, associate director at broker L&C Mortgages.

“Although that hasn’t sent rates sky high, it’s certainly forcing borrowers to make quicker decisions and act quickly to secure a deal.”

How to beat inflation

One of the best ways to protect your cash savings is to find an account offering real returns – i.e. paying inflation-beating interest rates. But even then, most people shouldn’t hold excessive amounts of cash.

Once you have built up enough savings to cover day-to-day spending, emergencies and near-term savings goals (which could range from a house deposit to a wedding), consider investing. A diversified portfolio of investments can be a good guard against inflation, and is one of the best ways of building long-term wealth.

Before investing, you should be willing to lock your money up for five years or more, as this can help you ride out any short-term market volatility.

Although equity markets can be volatile, data from Barclays looking back over the past 120 years 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.

Also see: Beginner's guide to investing

House price inflation slows to 2.8%

Each month on inflation day, HM Land Registry also publishes its latest house price report, showing how much property prices have gone up or down over the past year.

Land Registry data is published with a two-month time lag, so this month’s report covers July (rather than August, which is what the CPI report covers).

Annual house price growth slowed to 2.8% in July, down from a revised estimate of 3.6% in June. On a monthly basis, prices grew by 0.3%. It takes the typical UK property to £270,000, which is around £8,000 higher than a year ago.

Food inflation could reflect tax changes in last year’s Budget

Weak growth and high borrowing costs have created a challenging fiscal backdrop for the government, particularly given its promise not to raise the three main working taxes.

In an attempt to raise money in last year’s Budget, the government increased employers’ National Insurance contributions, but it was far from a silver bullet. The effects are now being seen in the economic data.

Economists and company bosses say rising food prices are a consequence of higher labour costs. The National Insurance hike has made it more expensive for companies to hire people, and they are offsetting some of the impact by putting prices up. An increase to the minimum wage has had a similar effect.

“Retailers are doing everything they can to deliver great value for their customers, but are unable to absorb the £7 billion in costs they have been landed with this year thanks to the rising cost of National Insurance, a higher National Living Wage, and a new packaging tax,” said Kris Hamer, director of insight at the British Retail Consortium.

He warns that imposing more costs on businesses in this year’s Budget could push inflation even higher.

Traders pricing in just one more rate cut

According to investment platform Hargreaves Lansdown, traders are pricing in just one more rate cut between now and the end of 2026. Markets have become more cautious in recent weeks after the Bank of England expressed concern about inflation pressures.

Some economists are slightly more optimistic. Financial institution ING still thinks we could see a cut in November this year, with more to follow in 2026. Deutsche Bank broadly agrees, but thinks this year’s remaining cut will come in December.

ING’s UK economist James Smith said: “Certainly, we aren’t in the camp that thinks rate cuts are over. Services inflation should show more visible progress next spring, while wage growth should ease below 4% by year-end.

“Add in the fact that the late-November Autumn Budget is likely to be dominated by tax rises, and we think there’s still a decent case for UK interest rates to fall two or three more times by next summer.”

Thank you for following our inflation live coverage today. The next report (covering September) will be published on 22 October. For the remaining dates in 2025, see our CPI release calendar.

The week's busy news agenda will continue tomorrow with the Bank of England's interest rate decision, due at midday. Our preview analysis has already started over on our interest rates live report. Join us there.

Andrew Van Sickle: After more than a decade of poor performance, emerging markets (EMs) have staged a comeback this year. The benchmark MSCI EM index has gained more than 20% in US dollar terms. What has brought out the bulls?

Gustavo Medeiros: I think there are three key drivers here. The first is that we had historically low valuations at the start of the year. The second is that over the last 18 months or so, earnings per share have started to climb, helped by healthy growth in several countries and buoyant industries such as AI and semiconductors.

Earnings per share in the MSCI EM Index are now expected to rise from $80 to $96 or so this year. Profit growth has eclipsed that of the MSCI World index over the past four quarters. The third source of support is the weaker US dollar.

Andrew Van Sickle: That usually bodes well for EMs, which are risky assets; a buoyant greenback, along with high US interest rates, bolsters the appeal of safer US assets. Have global investors become disillusioned with America?

Gustavo Medeiros: America has the world’s reserve currency and the deepest capital markets in the world. So the key determinant of global asset allocations will be how the biggest market is performing in absolute and relative terms. High valuations and the tariffs on “liberation day” unnerved investors, reminding them that they needed to diversify away from the US. Structural improvements in developing economies, notably lower inflation, and a shift to pro-market policies post-pandemic, have also helped bolster sentiment. There have been more upgrades than downgrades of EM sovereign debt for some time now, for example.

Meanwhile, although EMs are traditionally comparatively dependent on trade, with large shares of exports as a percentage of GDP, Liberation Day at least tempered the uncertainty. It became clear that tariffs would not fall below 10% but were also unlikely to exceed 30%. On paper Mexico and Vietnam are the most vulnerable, with exports to the US worth 25% of GDP in each case – although a pre-existing Trump-originated deal in the former, and a strategic partnership with the US in the latter, tempers risk. Their stock markets have rallied 40% this year, as have those of Southeast Asia, the next most vulnerable economies.

Andrew Van Sickle: Shall we take a closer look at the structural changes in EMs, a recurring theme for 10 to 15 years now? Everyone used to think of EMs as commodity-exporters heavily geared to global growth, but there’s far more to the story these days.

Gustavo Medeiros: Yes, there is a wide array of supportive factors. In Asia, India and Indonesia are two examples of major economies that have gained momentum through structural reform. Chinese technology, chipmaking in Taiwan and AI are also boosting EM growth. In Latin America, there are many high-quality undervalued companies that have embraced digitalisation and have enormous target markets, yet politics has obstructed the investment opportunity. A series of coming elections are likely to result in a shift towards a more free-market approach, which bodes well for profits and interest from global investors.

Peripheral Europe and central Asia should benefit from a strong boom in capital expenditure on defence, energy and infrastructure coming from Europe, a result of Europe’s attempt to become more self-sufficient. Meanwhile, a round of fiscal consolidation in Ghana, Nigeria and Egypt, following the tight squeeze imposed on Argentina by president Javier Milei, is good news for some of the smaller, more exotic markets.

Andrew Van Sickle: I remember being struck, during the pandemic, by EM central banks being quicker off the mark when it came to squeezing out inflation by raising interest rates than their developed-market counterparts. Overall economic management has improved greatly in EMs.

Gustavo Medeiros: Economic policy has been much better, much more sensible over the past five years in EMs. They raised rates rapidly to counteract the global boost to inflation and avoided quantitative easing; they were mostly restrained when it came to fiscal stimuli, too and quicker to consolidate their deficits. They clearly learnt from the debt crisis of the 1980s and 90s and opted for prudence this time. That leaves them well-positioned for strong and sustainable growth.

Andrew Van Sickle: Let’s zoom in on some of the major economies and markets now, starting with China. A drift towards authoritarianism and the fear that it could turn into another Japan have been two key bearish factors. How would you assess the situation?

Gustavo Medeiros: One simply has to factor in that China has a different political system. The key is the extent to which the private sector is allowed to flourish. And here, the news has improved over the past year. We have become more optimistic recently. Since last autumn, policymakers have been far more willing to support enterprise. It started with measures to backstop the real-estate sector, which has been a major drag on activity. Then the central bank allowed firms to borrow cheaply to buy back their undervalued stocks, accelerating a trend towards buybacks that companies had started themselves. That was a key turning point for us.

The state is also supporting developments in technology, with DeepSeek’s large language model being rapidly adopted in both the public and private sectors. The government hopes to harness AI’s potential to accelerate progress in areas where China is already leading, such as robotics, electric vehicles and cutting-edge biotechnology. The big picture is that the government used to favour particular industries, but now seems to be keen to bolster the entire private sector.

And this is very important. The main reason countries get stuck in the middle-income trap is a failure to innovate, not adverse demographics or other factors. This is clear to Beijing, which is why the leadership keeps on pushing to make their economy more productive, and keeps on pushing to be at the forefront of technological development in many industries. Beijing is also acutely aware that some sectors are oversupplied, with rampant competition rendering margins razor-thin. The banks have fuelled the boom in capital expenditure, and could now take measures to help sector leaders buy up less productive rivals and perhaps rein in lending to struggling mediocrities. The least productive companies should gradually fall by the wayside. These measures are meant to address fears over the Japan-style zombiefication of the economy.

Andrew Van Sickle: Very encouraging. Taiwan is still the second-biggest weighting in the MSCI EM index. That’s due to chip giant TSMC, isn’t it? It’s the AI story.

Gustavo Medeiros: It has the tightest grip on the sector thanks to its ability to produce cutting-edge chips economically, with cutting-edge equipment. It would take years and a vast amount of capital for another company to emulate them, so that provides the company with an enduring competitive advantage; a deep “moat”. While Google could face a threat in search and Apple would struggle if another firm comes up with a gadget that is better integrated with AI than Apple’s range, I don’t see TSMC’s lead being eroded anytime soon.

Andrew Van Sickle: Let’s look at India, which you have described as the most exciting structural-growth story in EMs.

Gustavo Medeiros: No exciting structural story goes in a straight line, and there are now some wrinkles in the case of India. Around 18 months ago, valuations became extremely overpriced, which has been a headwind. And the pace of growth in capital expenditure, having surged in prime minister Narendra Modi’s first term as investment in infrastructure galvanised investment in the private sector, has ebbed.

A bright spot at present is the banking sector. Valuations are reasonable, private banks have done well with the adoption of fintech and have been able to deliver strong growth. Meanwhile, inflation is under control and short-term interest rates have been cut. The interest-rate curve is thus steepening, which is good news for banks’ net-interest margins. President Donald Trump’s tariffs are another headwind for now, although the economy is relatively insulated from global trade, given the large consumer sector.

The long-term outlook is still favourable, however, given the demographics, the dynamic private sector (the service sector will be able to exploit AI) and the gradual evolution of a manufacturing sector in recent years. Apple, for example, have said they will make all iPhones sold in the US in India by 2030.

Andrew Van Sickle: Finally, you have described Indonesia as a structural-reform story trading at crisis-level valuations.

Gustavo Medeiros: A year ago, power was transferred to president Prabowo. He is market reform-orientated, like his predecessor Jokowi, but investors appear to have been spooked by two policies. One was free school meals. This is sensible, but it took up a large share of the budget in a traditionally low-tax, small-government economy.

Then he consolidated state-owned companies into a sovereign wealth fund in order to gather their dividends together and allocate the money to the economy more effectively. Again, sensible enough, but investors were nervous because of the recent scandal surrounding Malaysia’s 1MDB sovereign wealth fund. Just as investors were starting to digest the uncertainties, the protests on the streets of Jakarta led to the exit of experienced finance minister Sri Mulyani. She was seen as one of the safest pair of hands across EMs, so even though her successor is likely to keep her policies unchanged, her exit was another blow to confidence.

Still, the broad pro-market direction is unchanged, and the long-term structural-growth story remains compelling. Indonesia has lots of metals that will be crucial to the global energy transition, while demographics are also a tailwind.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

Summary

• Inflation rose to 3.8% in July, up from 3.6% in June, according to figures published by the Office for National Statistics (ONS) this morning. It means inflation is at its highest level since January 2024.
• The largest upward contribution to the inflation jump came from the transport division, particularly airfares.
• Longer term, Bank of England forecasts suggest inflation will peak at 4% in September before gradually falling back towards the 2% target by 2027.
• The Bank of England’s governor Andrew Bailey recently told the BBC that although the path for interest rates is still downwards, the course is now “a bit more uncertain” given ongoing inflationary pressures.
• The Bank cut interest rates to 4% on 7 August in a knife-edge decision that required two votes before reaching a 5-4 verdict. The close split has caused investors and economists to adjust their interest rate expectations going forward.
• Most experts now expect a maximum of one more interest rate cut before the end of the year.

| What is inflation? | CPI versus RPI inflation | When will interest rates fall further? | CPI inflation release dates | Bank of England meeting dates |

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.

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.

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 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.

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.

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.

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”.

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.”

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.

Welcome back – 15 minutes to go

Good morning and welcome back to our live report. In 15 minutes, the Office for National Statistics (ONS) will publish July’s inflation figure. It is expected to show another jump to 3.8%, which would be the highest reading since January 2024.

Stick with us for the latest news, plus what it means for your finances.

Patience could be required from investors when it comes to inflation

Although investors won’t be delighted if inflation jumps again this morning, patience could be required, according to Michael Field, chief equity strategist at investment firm Morningstar.

“Economists have previously warned that we could be dealing with elevated levels of inflation for a transitory period,” he said.

“We believe this is how the Bank of England will view the situation when making upcoming decisions on interest rate levels. Interest rates in the UK are the highest in the western world, so the bank has plenty of room for manoeuvre, even with elevated inflation in the short term.”

Field points out that UK equity markets are trading at all time-highs. “While inflation remains somewhat concerning, the effect of lower interest rates feeding through the economy should only add weight to investor confidence.”

BREAKING: Inflation jumps to highest in 18 months

UK inflation hit 3.8% in July, up from 3.6% in June, in line with analysts' expectations.

What drove the inflation jump?

The largest upward contribution to the jump in inflation came from the transport sector, particularly airfares. Economists had foreseen this heading into today's report.

Commenting earlier this week, Sanjay Raja, Deutsche Bank's chief UK economist, said: “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.”

Transport costs up 3.2% as airfares took off

Transport costs rose by 3.2% on an annual basis in July, up from 1.7% in the previous report. As introduced previously, airfares were largely responsible as prices soared in the busy summer period.

Airfares jumped by 30.2% on a monthly basis – the largest July increase since records began in 2001.

Petrol prices also pushed inflation higher

Motor fuels also added pressure to inflation in the latest report, with the average price of petrol rising by 2 pence per litre between June and July 2025. This compares to a drop of 1.4 pence per litre between June and July 2024.

Diesel prices were up 2.9 pence per litre over the same period, versus 1.1 pence per litre a year ago.

Despite experiencing a bigger monthly jump this July than last, fuel is still cheaper than it was a year ago. A litre of petrol now costs 133.9 pence on average, versus 144.4 pence a year ago. Diesel costs 141.4 pence, down from 150.4 pence a year ago.

Although fuel prices are volatile, the overall trend has been a downward one after prices peaked in late 2022 during the energy crisis.

Rachel Reeves: "More to do to ease the cost of living"

Today's inflation jump was not unexpected, but it will still come as bad news to chancellor Rachel Reeves. It creates an even more challenging backdrop in the lead-up to her Autumn Budget, where tax hikes are widely expected.

Responding to this morning's report, Reeves said: “We have taken the decisions needed to stabilise the public finances, and we’re a long way from the double-digit inflation we saw under the previous government, but there’s more to do to ease the cost of living.

“That’s why we’ve raised the minimum wage, extended the £3 bus fare cap, expanded free school meals to over half a million more children, and are rolling out free breakfast clubs for every child in the country. Through our Plan for Change we’re going further and faster to put more money in people's pockets.”

Larger-than-expected jumps in core and services inflation could create concern

Core and services inflation both jumped in July – and by more than some economists were expecting.

Core inflation strips out categories that tend to see short, sharp fluctuations in prices, like food and energy. Meanwhile, 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 rose from 3.7% to 3.8% on an annual basis in July, while services inflation rose from 4.7% to 5%. For comparison, economists at Deutsche Bank had been forecasting readings of 3.7% and 4.9% respectively, meaning both figures came in slightly higher than they were expecting.

Some will be wondering whether the recent increase in employment costs is having an impact on services inflation. Businesses warned this could happen after a higher minimum wage and higher payroll taxes kicked in from April this year. Many said they would look to offset some of these costs by increasing their prices.

"Increasing services inflation suggests that rising National Insurance and National Living Wage costs are exacerbating underlying price pressures by more than offsetting the current downward squeeze from looser labour market conditions," said Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales.

Food prices accelerate again

Higher food prices have been adding pressure to inflation in recent months, and prices accelerated again in July.

The cost of food and non-alcoholic beverages rose by 4.9% on an annual basis, up from 4.5% in the previous report.

The Office for National Statistics points out that this is the fourth consecutive increase and the highest rate recorded since February 2024. Despite this, the rate of food inflation remains below the peak seen in early 2023.

On a monthly basis, the cost of food and non-alcoholic beverages rose by 0.4%.

Some of the items contributing to higher food inflation in July were meat (mainly beef), sugar, jam, honey, syrups, chocolate and confectionary, coffee, tea, cocoa, mineral waters, soft drinks and juices (mainly fresh orange juice).

Higher inflation could be bad news for mortgage rates

Those who are looking to take out a mortgage (or refinance after the end of a fixed-rate period) will be disappointed by today's inflation jump. With inflation high and rising, the Bank of England could be more cautious when it comes to future interest rate cuts. That certainly seemed to be the tone of its last meeting on 7 August, when a rate cut was only narrowly voted through by a 5-4 majority.

David Hollingworth, associate director at broker L&C Mortgages, says that mortgage borrowers have recently been enjoying a market where rates have been dropping, but these reductions "have tended to come in small increments".

"We could see that slow further or even reverse in some cases if the market reacts badly to the threat of higher inflation than was previously expected," he explains.

"Borrowers holding out for more cuts may want to keep close tabs on mortgage rates. It’s far from doom and gloom but securing a rate now will protect against any turnaround while still allowing for a review before completion, if there are further improvements."

Upcoming reports will be important for pensioners, with implications for triple lock

Every inflation report feels significant at the moment given recent economic volatility, but the next few months could be particularly important if you are a pensioner.

September's inflation report (published in October) and next month's wage growth report (covering May-July) will be used when calculating how much state pension you receive.

Each year, state pension payments are increased in line with the triple lock rules. This means pensioners see this portion of their income rise in line with inflation, wage growth, or by 2.5% – whichever is highest.

The Bank of England currently expects inflation to hit 4% in September, the all-important month for pensioners. Wage growth is currently slightly higher than this at 4.6% (including bonuses), although it could shift slightly in next month's report.

"Wage growth has been drifting down, but it seems likely we will see a state pension increase somewhere in the 4-4.5% ballpark for next year. This would give someone on a new state pension an uplift somewhere around £479-538 per year. Someone on a full basic state pension would see that portion of their income rise by between £367-£413," said Helen Morrissey, head of retirement analysis at Hargreaves Lansdown.

"These increases would be much smaller than the huge boosts we’ve seen in recent years, but they will be welcome nonetheless. The increase won’t be implemented until April 2026 and it’s to be hoped that inflation will have dipped significantly by that point, so it should give a bit more breathing space to pensioner budgets that have been sorely stretched."

Does today’s inflation print look worse than it is?

Although today’s jump takes inflation to its highest level in 18 months, several experts point out that some of the drivers are short term in nature.

“Services inflation rose slightly but the root cause was holiday expenditure: airline prices jumping as school holidays started, and hotels and restaurants no doubt reflecting the same,” said Michael Browne, investment strategist at Franklin Templeton, the asset management firm, “The comment in the MPC report that even the Hawks think this is short term, has not received enough scrutiny.”

Others point out that the Oasis reunion tour may have contributed to higher hotel and restaurant costs too, with prices in this category rising by 3.4% on an annual basis in July, up from 2.6% the month before.

Annual house price inflation is 3.7%

Each month on inflation day, HM Land Registry also publishes a report on how much house prices have gone up or down over the past year. Official house price data is published with a six-week time lag, meaning today's report covers the year to June (rather than July, which is the month covered in the latest CPI report).

UK house prices rose by 3.7% over this time period, bringing the average property to £269,000 – around £9,000 higher than a year ago. On a monthly basis, prices rose by 1.4%.

Remortgaging this year? Here’s what today’s economic environment means for you

For the reasons explored in a previous post, today’s inflation jump may come as bad news for those shopping around for a new mortgage deal. Given inflation is high and rising, many expect the Bank of England to slow down the pace of rate cuts – which could mean mortgage rates stall.

That said, there is some good news for those who are looking to refinance over the coming months as they come to the end of a two-year fix.

The average two-year fixed rate is currently 4.98%, according to comparison site Moneyfacts. This is considerably cheaper than this time two years ago. At its peak in August 2023, the average two-year rate was 6.85%.

For someone borrowing £400,000 over a 25-year mortgage term, this drop in rates equates to a £455 drop in monthly repayments.

Things don’t look quite so good for those coming to the end of a relatively cheap five-year deal agreed before rates started rising in 2021. Their monthly repayments are likely to jump when they refinance.

Moneyfacts: Fewer than half of savings accounts beat inflation

Data from comparison site Moneyfacts shows that fewer than half of available savings accounts now beat inflation. Savers have been hit by a double whammy of rising inflation and falling interest rates in recent months.

Of the 2,004 savings accounts currently available on the market, just 956 beat inflation. This has fallen from 1,558 inflation-beating deals a year ago (August 2024).

"After almost a year and a half of savings growth, many savers are slipping back into earning negative real returns as inflation figures jump again," said Caitlyn Eastell, a Moneyfacts spokesperson.

"With inflation running higher than the interest savings earn, money left languishing in a low-interest account is losing its spending power – making it tougher to achieve a sense of financial resilience or save towards goals."

This highlights the importance of shopping around for the best deal. Some of the top accounts are still paying around 5%, but savers should act sooner rather than later to boost their chances of earning a real return.

See our round-up of the best easy-access rates, one-year savings accounts, regular saver accounts and cash ISAs for the latest deals on cash savings.

Where is inflation heading next?

Inflation is expected to pick up over the next couple of months, peaking at 4% in September, according to the Bank of England. Recent increases have been driven by higher food prices, energy prices and increases in some regulated prices like water bills earlier this year.

There has also been some uncertainty arising from global developments, including changes in trade policy led by US president Donald Trump. “While recent trade agreements mean there is less uncertainty than earlier in the year, we continue to watch closely what this could mean for UK inflation,” the Bank of England said.

Some commentators think higher UK employment costs may also have added pressure in recent months, after the minimum wage and payroll taxes went up in April. Businesses previously warned they might look to raise prices to offset the cost. Economists will be keeping a close eye on how this develops over the coming months.

While inflation has been rising so far this year, the Bank of England still thinks the underlying disinflationary trend is intact. After peaking in September, the Bank expects inflation to gradually fall back towards the 2% target, finally reaching it in the second quarter of 2027.

That concludes our inflation live coverage for this month. Thank you for joining us. Here is a list of upcoming CPI dates, covering the remainder of 2025:

• 17 September (covering August)
• 22 October (covering September)
• 19 November (covering October)
• 17 December (covering November)
• 21 January 2026 (covering December)

We will be back with further analysis then.

What’s the beef between Jerome Powell and Donald Trump?

US president Donald Trump wants a looser monetary policy – lower interest rates – to get the economy growing and mitigate the impact of the ballooning US federal debt. Jerome Powell, the chairman of the Federal Reserve, the US central bank, sees his job as to resist that political pressure and is determined to carry on targeting inflation as the best way of ensuring long-term economic stability and growth. It’s an age-old (or at least decades-old) story of tension between elected leaders and “independent” central bankers. But in the case of Trump and Powell, there’s genuine animus and the stakes are exceptionally high. Trump himself appointed Powell (a Republican ex-investment banker) to the job as Federal Reserve chairman in his first term in 2018. But Trump quickly regretted his decision due to Powell’s refusal to bow to political pressure. Within months, the president was publicly attacking Powell as “crazy” for continuing to gradually raise interest rates and unwind America’s quantitative easing.

Why not sack Jerome Powell?

A president can’t sack a Fed chair over differences on monetary policy. He can only sack them “for cause” – meaning malfeasance of some kind. Powell’s term as the Fed governor (though not as a board member, should he choose to stay on) ends in May next year, at which point Trump will no doubt try to find someone more malleable. In the meantime, Trump’s undermining of Powell has become toxic. The Fed has kept borrowing costs on hold at between 4.25% and 4.5% this year, even as other central banks have cut. That’s partly, by Powell’s own account, due to April’s “liberation day” tariffs and their upward impact on US inflation forecasts. Were it not for that fresh negative factor, the Fed “would probably have cut rates [again] by now”, said Powell last month. In response, Trump has become increasingly abusive – attacking Powell as a “numbskull”and “complete moron”.

Why is Trump so angry?

Because the political stakes are unusually high, the US federal debt is unusually high and Trump is an unusual president. “It’s pretty universal having a president who wants lower rates,” says Don Kohn, a former Fed vice-chair. “What’s unprecedented is [Trump] doesn’t want lower rates to goose the economy, [for him] it’s about lowering the cost of the debt. That’s worrisome because keying monetary policy to relieving budget pressures is a sure track towards higher inflation.” Last month, Trump claimed Powell’s reluctance to cut rates – “at least three points too high”, says Trump – was “costing the US $360 billion a percentage point in refinancing costs”. That’s a trillion dollars worth of anger, which has expressed itself in mounting public frustration, including presidential musings on whether to fire Powell, and a tense on-camera spat over the cost of Fed renovations – as Trump apparently hunts for a just “cause” to replace the governor.

Why does all this matter?

Because it has undermined market confidence in the independence of the Fed and the stability of US policymaking – sending the dollar sharply lower this year and making a bond-market crisis more likely, as investors (fearing their loans would be repaid in a depreciated currency) demand higher interest rates. Last week, in a rare rebuke – albeit one that didn’t name the US, its biggest shareholder – the International Monetary Fund warned that undermining central-bank independence risked triggering a debt crisis and that independent monetary policy is “a cornerstone of macroeconomic, monetary and financial stability”. In the case of the US, that matters to all of us. An increase in US credit risk due to concerns regarding fiscal sustainability could make financial markets excessively volatile.

Are central banks independent?

Over the past half-century it’s become the norm for central banks to be at least nominally independent in rich-world economies. The idea is that politicians can’t be trusted to run monetary policy because they are too influenced by short-term political considerations. Giving the Bank of England independence was first mooted by Nigel Lawson in the 1980s and finally happened in 1997 under Gordon Brown. By contrast, Germany’s Bundesbank, the first central bank to gain full operational independence (in 1957), was central to the Federal Republic’s relative price stability and economic outperformance. In the US, the Fed has notionally been independent since 1951. But the institution remains haunted by the blunder of chairman Arthur Burns, who was pressured by president Richard Nixon to cut interest rates in the run-up to the 1972 election – ultimately leading to disastrous “stagflation”.

Independence is better, then?

It’s simply a means to deliver superior price stability and economic performance. There is historic evidence, dating from the 1980s onwards, that independent central banks tend to foster greater price stability. But the charge that independence removes democratic accountability became more potent in the wake of the 2007-2008 financial crisis, as banks became more powerful and pursued highly politicised and contentious strategies such as quantitative easing. There has also been much less consensus over the purpose of monetary policy in an era of low inflation and low growth. Why target inflation when the real issue is stagnation? Central banks also struggled to cope with the post-pandemic inflationary shock, further undermining faith in their technocratic omniscience.

So Trump is right?

As with many of his views, there’s a kernel of truth. But any attempt to curb the Federal Reserve’s independence – especially when it comes to rate-setting – would be very bad news for financial markets. As John Authers puts it on Bloomberg, “Independence may be the worst form of central banking – except for all the others.”

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Are you looking for new ways to save for the medium to long term beyond obvious options such as individual savings accounts (ISAs) and private pensions? If you work for one of the 1,000-plus employers in the UK that offers an employee share scheme, joining it could make sense. These schemes, which must be aimed at all employees (not just top executives), can even be combined with ISAs to maximise tax efficiency.

There are two options here. The simplest scheme is a save-as-you-earn (SAYE) plan, sometimes known as Sharesave. You save up to £500 each month into the scheme’s nominated savings account, typically for three to five years; the money usually attracts a fixed rate of interest, and some schemes offer a tax-free bonus at the end of the plan. At this stage, you can invest your savings into shares in your employer at a price agreed before the plan began. This price can be set at a discount of up to 20% of the share price at the start of the scheme.

Minimal risk with SAYE schemes

If your employer’s share price is higher than this “strike price” when you’re ready to buy, you’re sitting on an instant windfall; you can use your savings to buy the shares and then sell at an immediate profit, or hold on in the hope of further gains. Alternatively, if your employer’s shares have fallen since the scheme began, making the strike price look expensive, you can simply ask for your cash back.

SAYE schemes, then, are more or less risk-free. Your cash savings may lose value in real terms if you can’t cash them in at a profit – if inflation outstrips your interest income – but there’s no potential for them to drop in nominal value. If you leave your employer before the scheme reaches maturity, you normally get your cash back in full.

Share-incentive plans (SIPs)

The alternative, favoured by some employers, is a share-incentive plan (SIP). In a SIP, you can invest up to £1,800 a year in shares in your employer, with the money coming out of your salary before income tax and national insurance are deducted; that’s effectively tax relief on your investment, although you must hold the shares for at least five years to retain this advantage. After five years, you can sell up; profits are potentially subject to capital-gains tax, but only gains accrued after the five-year period count towards this calculation. The exact terms of your SIP will depend on your employer. Some companies offer free matching shares in line with your contribution; they’re allowed to give you stock worth up to £3,600 a year. And some run dividend reinvestment schemes, enabling you to use the dividends paid on the shares you’ve bought to make further investments. There is more of a risk with a SIP. You’re investing in shares that may fall as well as rise. But the up-front tax perks ease this risk somewhat – and if you qualify for free matching shares, that will also make a difference.

SAYE plans, SIPs and ISAs

Finally, don’t overlook the potential to use ISAs alongside these schemes. With both SAYE plans and SIPs, you have 90 days to transfer your shares into an ISA at the end of the scheme’s term; this will ensure any subsequent income and profits are sheltered from tax. But the value of the transfer does count towards your £20,000 ISA allowance in the year you move the investments.

One last question to consider with employee share plans is whether you’re at risk of becoming too dependent on your employer (relying on it for both your earnings and your investment growth) – although diversifying your investment portfolio through other holdings will certainly help.

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“Sire… worse than a crime, you have committed an error,” said Charles Maurice de Talleyrand-Périgord. A crime is whatever the feds say it is. Often not what you think it ought to be. But an error is different. It is a left turn when you should have turned right. It is forgetting your wife’s birthday. It is a budget deficit, when you should have been running a surplus.

In the Big, Bad, Budget Abomination, for example, there are two huge errors. The obvious one: they increased the deficit. They chose more spending, not less – even more money they don’t have on programmes they don’t need. And they are doing it on such a large scale – with $2 trillion deficits – it is sure to blow up the entire US financial system.

We all know you can’t spend more than you make for long. But some people delude themselves that we’ll “grow our way” out of the debt trap. As we’ve seen, in the light of federal policies, such growth is less and less likely. As Fortune points out, the US may see more than 500,000 people emigrate from the country as a result of Donald Trump’s aggressive deportation campaign. The hit to the US labour force is likely to shrink the country’s GDP.

Deficits will also gobble up the supply of capital. “As government spending increases, the less productive public sector absorbs more labour and resources, starving the more productive private sector of these critical inputs,” as Seeking Alpha points out. The predominant view is that, although the feds’ deficits are clearly a mistake, it will take many years for the harm to show up. So, the consequences, such as they are, will probably fall on our children and grandchildren, not on ourselves. And since none of us knows the future, why worry about something that may or may not actually happen sometime in the distant tomorrow?

Debt deniers and the Republican "spendfest"

Yet the iceberg is dead ahead and the danger looms closer. Inflation rose in June, for the second month in a row. Whether this marks the beginning of large price increases or not, we don’t know. But it might be a good idea to keep an eye on the lifeboats, just in case.

Other debt-crisis deniers look to Japan for comfort. Except for the fact that their economy is shrinking (along with their population), a Fuji of debt – the biggest pile in the world – hasn’t seemed to bother them. But wait. Even there, the error is becoming more apparent. The yield on ten-year Japanese government bonds has hit 1.595%, the highest since October 2008. The Japanese can do maths. At 250% of GDP, even a small increase in interest rates has a devastating effect on government finances. The government must borrow to cover the interest payments, which widens the deficit, increases the debt and raises the cost of interest.

Back in the US, the Republicans’ “spendfest” goes on and the errors multiply. Not only are they spending too much, they are claiming to spend too little. After all, if huge deficits don’t really matter, why try to save money on medical care for those who need it?“GOP lawmakers are warning that slashing spending on Medicaid and food assistance will cost the party seats in the mid-terms – threatening their razor-thin House majority – by kicking millions of Americans off safety-net programmes,” says The Hill. The poor lawmakers had to decide. Which error, which sin, which mistake to make. Being fair about it, they make them all.

For more from Bill, see bonnerprivateresearch.com

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Investors in 2025 are either anxious or happy. The anxious believe investing is all about costs. Buy some cheap trackers, and in the long run, you’ll do fine with minimal effort. The happy are active investors who have avoided the largest stocks. It is an anomaly for the largest stocks to lead the market (1929, 1972, 1999 excepted), and following the crowd into richly valued areas doesn’t end well.

As an active manager, I have found 2025 rewarding mainly because my portfolios pursued value outside the US. A weak dollar has meant US equities have lagged the world. US equities have delivered zero returns in sterling this year, and the MSCI World index, with 70.3% exposure to the US, is up just 2.4% including dividends. Contrast that with the FTSE 100, up 12%, or the pan-European EuroSTOXX, up 20% this year. US exceptionalism has once again been exaggerated.

Passive investing makes sense for people who do not want to take an interest in their finances, which presumably counts out MoneyWeek readers. It delivers a market return, before fees, and prevents a worse outcome from incompetent active managers or bad actors. Being cheap and simple, it deserves to be the default option for the majority, and rightly so. After all, beating the markets is a minority sport.

Therein lies the opportunity. Passive management is now so vast that, according to US investment platform Market Structure Edge, trading in index products accounts for 56% of market volume; in 1995, it was in its infancy. If passive management today is so vast, it means active management should provide fertile grounds for rich pickings.

This is reaffirmed by a recent market trend that shows active fund-management companies on the up this year, while the passive managers are waning. For example, shares in institutional active manager Schroders are up 25%, while BlackRock, owner of iShares, is down for the year. Is this a one-off? I don’t think so, because the valuation gap is enormous. Schroders trades on twice sales, with a free cash-flow yield of 16%. Contrast that with BlackRock on a hefty eight times sales with a free cash-flow yield below 3%.

Youthful investors forget, or have never witnessed, that active managers were among the most highly rated stocks in the 1990s. Today, they are dirt cheap. My recent picks include Man Group, Jupiter, and the Dutch company Allfunds, which provides trading infrastructure for the funds sector.

The investors' Money Map

Other investment themes that stand out include gold, precious metals and copper – all beneficiaries of a weak dollar, money printing, and burgeoning deficits. There’s bitcoin and crypto, which are increasingly looking like core allocations. There are also the banks, which benefit from high interest rates, and China, which has impressive technology companies trading on attractive valuations.

On the other hand, 2025 has been another year to avoid gilts. The long bond yield has settled at 5.5%, a level not seen since 1998. It is supposed to mimic annual nominal GDP growth, which comprises economic growth (1.3%) and inflation (4.4%), so the yield is about right. For it to come down, we would need to see a recession to break inflation, tough love in dealing with the budget deficit, or “growth” policies that don’t involve raising taxes. A recession will come about sooner or later, as they always do, but a balanced budget? Unlikely.

The economy may be in better or worse shape next year, but does it matter? In 30 years since I took an interest in financial markets, I am certain that value is more important than the economy. Therein lies the importance of my Money Map (pictured), which I last wrote about for MoneyWeek in 2017: What to take with you in the investment jungle. It outlines the investment strategy most suited to different macroeconomic environments. When times are good, stay on the right, and when bad, stay on the left. When inflation rises, stay high, when it is low and stable, duck.

I have long built portfolios around this idea, filled with undervalued stocks, bonds, commodities, or funds. The Money Map helps to identify the key areas on which to focus, and more importantly, the areas to avoid. Above all, this is how to diversify a portfolio: by having exposure to each quadrant, whatever the weather, because macroeconomic environments can change quickly.

That said, I have more exposure to the favoured quadrant, and to the adjacent quadrants, with less in the least-favoured one. In recent times, this has meant having more value, and less quality and bonds in the portfolios, while staying broadly neutral in growth and gold. At some stage, this will change, probably when there are clear signs that inflation is under control and interest rates fall.

I am looking forward to that because you will have noticed that quality stocks such as Unilever, Diageo, and Reckitt Benckiser have struggled in recent years and now offer good value. In the US, quality stocks such as Nike, Procter & Gamble, McDonald’s and PepsiCo are also waning, and maybe they’ll be cheap by 2026, or 2027. In any event, the world’s best companies have had their bubble pricked and are headed lower, which is something to look forward to.

Charlie Morris is the CEO and founder of ByteTree. It offers investment research for private clients through the Multi-Asset Investor, in addition to other research services. ByteTree also has a Bitcoin and Gold ETF (BOLD) managed by 21Shares in Zurich.

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UK inflation hit 3.6% in June 2025, prompting savers and investors to wonder how they can protect the value of their money from the corrosive impact of inflation.

Investing in gold could be one solution. The yellow metal has long been viewed as a hedge against inflation. It is finite: there is only so much gold in the world, besides as-yet unscalable instances of scientists achieving alchemy by turning lead into gold.

“Because the commodity has a limited supply, the value of gold often rises during longer periods of high inflation,” said Rick Kanda, managing director at The Gold Bullion Company. During these periods, “investors sometimes turn away from stocks and invest in previous metals instead”, he added.

Inflation means investors need to get clever with their investments. Cash won’t do: over time, inflation tends to outpace the returns from cash, so if you’ve not already considered getting started in investing, now is a good time to do so.

Inflation has been rampant over recent years, and as it has climbed, so has the gold price. But how strong is the link between gold prices and consumer prices – and can investors use gold to hedge against inflation?

How are the gold price and inflation linked?

The relationship between gold prices and inflation isn’t too clear over the long term.

The chart below plots the gold price in pound terms against the UK’s headline consumer price inflation, month-by-month, over the five years to June 2025.

While there are some periods when gold prices have climbed alongside inflation, the correlation isn’t seamless. Inflation rates have been falling since 2023, but gold prices have continued to rise. Since the start of 2024, gold prices in pounds have moved in opposite directions from the headline inflation rate.

There’s lots of reasons why the two don’t move in lock-step. For one thing, gold is traded in dollars rather than pounds, so its price has a less direct relationship to the UK economy.

There are also broader influences on the gold price than currency devaluation. The gold rally that started in 2024 was catalysed by increased gold purchases by central banks. That, clearly, has little to do with the direction of travel of gold prices.

But on a larger scale, gold tends to be a commodity that performs during periods of global inflation and instability.

“When it comes to the price of gold, inflation is extremely influential,” said Kanda. “Gold typically performs well in economic uncertainty caused by global conflicts and tariffs, and inflation is one variable where this is the same.”

How can investors use gold to hedge against inflation?

In Kanda’s view, the best ways to use gold to hedge against inflation are to buy gold coins, or gold bullion.

Coins, he says, offer a good halfway house between price and divisibility. They are also relatively liquid and can be exchanged easily at a gold dealership.

Gold coins are also exempt from capital gains tax.

But beginner gold investors should also consider gold bars, largely because manufacturing costs tend to be lower compared to coins, “resulting in lower purchase prices per gram for gold bars.

“This could help maximise your profits if you go on to sell at a later date,” adds Kanda.

Alternatively, if investors don’t want to hold physical gold, they could invest in a gold fund.

How else can investors hedge against inflation?

Gold is one way to give your investments some defence against inflation, but it is not the only one.

The stock market tends to beat inflation over the long term, though of course inflation can be bad for certain sectors and persistent inflation can dent market sentiment.

Real estate is one potential inflation hedge, given the fact that rising consumer prices tend to be captured by rising house prices.

Read more at our explainer on how to hedge against inflation.

There are not that many people still working in investment who can remember a time when Japanese government bond (JGB) yields did not trend inexorably down. They peaked in 1990, just after the bubble began bursting, and declined through most of the following 35 years.

For the entirety of my career, shorting JGBs has been known as the “widow-maker”. No matter how low yields went, they always found a way to fall further, wiping out anybody reckless enough to bet that the bottom had been reached.

This may be why the big upward moves in longer-dated JGBs over the past year have not drawn as much attention as you would expect. Anyone who has been conditioned to expect JGB yields to be low forever will instinctively doubt that it can last. This is a brief upheaval, and they will soon head right down again.

Yet, something fundamental seems to have shifted. The 30-year JGB currently yields 2.9%, comparable to the 30-year bund at 3.1%. It had ticked up to almost 3.2% before the Bank of Japan said it would reduce the pace at which it is stepping back from quantitative easing (QE), while the Ministry of Finance indicated it would issue less ultra-long-dated debt in future.

The implications of this are significant – not just for Japan but also for global markets, because low-yielding Japanese debt has been a key funding source for many global carry trades. Borrow at low rates in one currency, invest in higher-yielding assets in another, pick up the difference in returns and hope you can unwind the trade before something – eg, typically a massive currency move – leaves you with sudden losses.

Long-dated JGBs signal uncertainty everywhere

Still, the higher yields on long-dated JGBs don’t imply that Japanese monetary policy is going to normalise any time soon. Markets are pricing in a very drawn-out adjustment – while the 30-year JGB and the 30-year bund are now in line, five-year yields are still well over a percentage point apart (0.97% vs 2.18%). This long-term distortion in global markets may gradually unwind – which is likely to be bullish for the yen over the long term – but it’s not immediate, or so the market thinks. Whether this may be too sanguine is another matter: if inflation (3.5% in May) remains high, rates should go up faster.

Instead, what long-dated bonds are signalling in Japan and elsewhere is a huge amount of uncertainty. Take the US 30-year Treasury, which now yields 4.8%. This doesn’t seem to be due to fears of runaway inflation in particular, because the 30-year inflation-linked Treasury is yielding about 2.5% (ie, the rate of inflation needed for them to return the same is just 2.3%). Rather, it simply feels increasingly reckless to lock up capital for so long. Investors worry about increased government spending, the potential for large amounts of bond issuance to fund it, politics (at the time of writing, the UK 30-year gilt had ticked up to 5.4%) and much more. They are right to be worried, and current yields still feel like very meagre compensation for those risks.

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The government’s imposition of inheritance tax (IHT) on farms has shone a light on an uncomfortable truth: returns on farming in the UK are generally poor. This leaves farmers reliant on capital appreciation for a reasonable return and without the ability to save enough to pay a periodic capital tax.

The government says land values have been inflated by the wealthy acquiring farms as part of their IHT planning, so imposing IHT will lower land prices and allow aspiring farmers to buy in. However, it is surprising how many wealthy people, such as Jeremy Clarkson, were initially attracted to farming by its tax advantages, but soon became hooked.

Horace wrote a romanticised eulogy to post-retirement farming: “happy the man who far from city care, with his own oxen ploughs his father’s land”. He describes the timeless appeal of being a gentleman farmer for those with means and without the burden of taxation and regulation. The reality is different.

The imposition of IHT will neither raise revenue nor lower land prices. Farmers can avoid it by giving away their farms more than seven years before death, or by turning their farms into partnerships. By making themselves the managing partner, they can retain control of the farm while giving partnership shares to family members, thereby multiplying the threshold value of the farm at which tax becomes payable.

Farming costs outpace prices

Ian Ivory, a fund manager turned farmer in Scotland, focuses on his return on capital. He argues that land, primarily seen as a hedge against inflation (it has multiplied in value by 22 times since 1971, on average), should be compared with a 10-year index-linked gilt, which yields 1.25%. A 5% cash yield should be applied to residential property, whether the farmhouse or cottages are available for rent or holiday lets. The return from livestock and equipment has to provide a return of 7%. “To achieve those targets, we need to have a pre-tax profit margin of 20%, but most farms struggle to hit 10%,” he says.

The problem is that prices have not kept pace with costs. “In 1971, wheat sold for £28 a tonne; now it’s £180, a [sixfold increase]. But wages have risen 45-fold, so remaining profitable has required increasing automation. Labour costs are now below 10% of our sales and subsidies also.” Agricultural prices have fallen far behind costs. In 1970, 165 lambs were needed to buy a stock tractor, but now the figure is 865. Fifty tonnes of grain were needed to buy an arable tractor; now it is 600.

Agricultural productivity has increased rapidly worldwide, but nowhere more than in the former Soviet Union. In the late 1980s, under collectivisation, the whole of the USSR was importing 30 million tonnes of grain a year. Now, Russia alone exports 50 million, while Ukraine, before the Russian invasion, exported 60 million. Eastern Europe will have added to the glut, and lower prices will have fed through into meat prices. In the past year, says Ivory, UK beef prices have risen 60%, but grain prices have fallen.

Farming success stories are few

Not only are farmers burdened with price volatility and falling prices, but the UK also struggles to compete globally. In New Zealand, Ivory says, sheep sell for £3 a kilo at a profit, while in the UK they sell for £6 at a loss. Farmers who can’t adapt or continue to farm as their families always have are inevitably struggling. Innovation and adaptation can offer a way out. Clarkson’s Farm shows a constant enthusiasm for new ideas, whether it’s a farm shop, a restaurant or a different crop, such as growing willow trees, whose wood commands high prices in the manufacture of cricket bats. Yet by the time the wood is ready to harvest in 15 years’ time, the price may have collapsed, as others have had the same idea.

James Dyson, owner of the largest farming business in the UK, has extended the season for English strawberries by growing them above ground in huge greenhouses, powered by renewable electricity and heat from an adjacent anaerobic digester. He is a champion of the use of technology to improve productivity. But few farmers can afford the capital investment required. For many farmers, land, geography and resources limit diversification. Farmers’ markets may help them get around the rigid pricing of the supermarkets; co-operation with neighbours to share resources should reduce costs; and there may be scope to turn commodity agricultural output into a branded product. But the success of the few shouldn’t blind us to the struggles of the many.

Sustainable Farming Incentive

Subsidies to farmers were £2.4 billion a year in the last parliament, but are being phased out. They come with environmental bureaucrats and politicians who treat farming with, at best, disdain. No wonder many farmers are attracted to the Sustainable Farming Incentive, newspeak for paying farmers not to farm on the premise that the authorities know more about environmentally sustainable farming than they do. As a last resort, farmers can always turn their land over to solar panels, although many are suspicious that the incentives won’t last.

It is remarkable that this densely populated country produces about 60% by value of the food it consumes. Moreover, the value of exports of food, feed and drink is nearly half that of imports. Agriculture uses 70% of the UK’s land area, but employs just 447,000 people, 1.4% of its workforce. Employment has fallen 6% in the last 20 years, but the decline of market towns all over the UK is a testament to lower incomes and a faster decline in related businesses, as well as to the increased productivity of farming. High farm values and Horace’s rural idyll provide a misleading picture of farming, now a capital-intensive, highly skilled vocation entailing constant innovation, long hours, volatile pricing and endless bureaucracy. This is not a business for the faint-hearted.

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Summary

• The rate of UK inflation jumped by more than expected in June, hitting 3.6%. It follows a reading of 3.4% in May.
• The Bank of England had forecast 3.4% this month. Other economists including those at Pantheon Macroeconomics thought inflation would creep up to 3.5%, but a reading of 3.6% comes as a surprise.
• Inflation is expected to rise further as the year progresses.
• “Looking ahead, upward pressures are likely to push annual inflation higher through the year. We see headline inflation peaking at 3.8%, before slowing through 2026,” said Sanjay Raja, Deutsche Bank’s chief UK economist.
• Although the Bank of England will pay close attention to June’s inflation report ahead of its next interest rate decision, a cut is widely expected on 7 August after signs of weakening in the jobs market.
• The economy also shrank for the second month in a row in May, according to GDP figures published on Friday.

| What is inflation? | What is the Consumer Prices Index (CPI)? | Inflation outlook | When will interest rates fall further? | CPI release dates | Bank of England meeting dates |

Hello and welcome. Will inflation rise tomorrow?

Good afternoon, and welcome to MoneyWeek’s live report on inflation. June’s CPI report will be published at 7 am tomorrow. Some economists expect inflation to hold steady at 3.4%, in line with the Bank of England’s forecast, while others expect it to creep up to 3.5%.

Stick with us as we bring you the latest preview analysis and live reporting. We will be looking at what’s driving UK prices, what it means for the Bank of England’s upcoming interest rate decisions, and how it impacts your personal finances.

Rising food prices could push inflation higher

Research provider Pantheon Macroeconomics expects CPI to creep up to 3.5% in June, partly driven by food prices. This would represent a 0.1 percentage point increase compared to May, when inflation was 3.4%. Extreme weather has impacted harvest yields, and higher employment costs are also pushing prices up.

Although Deutsche Bank expects the headline rate of inflation to hold steady at 3.4% in June, it also acknowledges the “continued pressure building in food prices”, describing retail and wholesale prices as “uncomfortably strong”.

Kantar grocery price inflation hit 4.7% in June, the highest annual rate since February 2024.

When was index day?

The exact CPI reading this month could depend on when the ONS collected its index data. Pantheon Macroeconomics has assumed it took place on 17 June, while Deutsche Bank has opted for 10 June. The timing of index day will impact the accuracy of their forecasts.

If the ONS went for earlier in the month, the headline CPI figure could be slightly lower than the 3.5% Pantheon has forecast. This is because airfares, hotel prices and clothes prices all appear to have risen later on in the month.

The warmer weather is partly to thank. It seems to have pushed hotel and clothes prices up in late June, as demand for travel and summer wardrobe items increased.

Will the Bank of England cut interest rates in August?

Even if inflation creeps up slightly to 3.5% in tomorrow’s report, an interest rate cut seems to be on the cards when the Bank of England next meets on 7 August.

The latest ONS report showed a marked slowdown in the jobs market which, if sustained, could strengthen the case for faster rate cuts. The unemployment rate increased to 4.6% annually between February and April, the highest level in almost four years. The number of job vacancies dropped by 63,000 over the quarter.

ONS survey data suggests some firms are not recruiting new workers or replacing those who have left as business confidence weakens. Wage growth also slowed to 5.2% annually over the same period, down from 5.6% in the previous report.

This could be linked to the fact that employers’ National Insurance contributions and the National Living Wage went up in April, making it more expensive for businesses to employ people. There are also fears that Donald Trump’s tariffs could dampen growth and push costs up for businesses and consumers.

Inflation vs growth concerns: a tough tightrope for the BoE

It feels strange to be discussing interest rate cuts when inflation is high and rising. The Bank of England expects CPI to hit 3.7% by September. But the MPC has a tough tightrope to walk. As well as keeping inflation under control, it needs to support economic growth.

Growth fears are now ramping up after signs of weakening in the labour market – discussed in our previous post. The economy also shrank for the second month in a row in May, according to GDP figures published on Friday.

“The upcoming base rate decision will be more than a number and it will provide critical insight into how the Bank of England views the balance between taming inflation and supporting a slowing economy,” said Adam French, consumer expert at financial information company Moneyfacts.

“Beyond the immediate market reaction, it will shape mortgage rates, guide fiscal confidence and underpin the central bank’s institutional credibility.”

What does higher inflation mean for your savings?

Savers are now getting squeezed on both sides. Inflation is high and rising, but interest rates are coming down.

Remember, even if inflation doesn’t creep up tomorrow, the Bank of England expects it to hit 3.7% by September. At the same time, most economists are forecasting two more interest rate cuts before the end of the year.

If the interest rate on your savings account is lower than the rate of inflation, you are losing money in real terms. Shop around for a better rate. 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.

Best rates on the market

The good news is that lots of accounts on the market still offer an inflation-beating rate. Using a comparison tool like Moneyfacts can help you find the best deals:

• Best easy-access savings rate: 5% (Cahoot and Chase)
• Best easy-access cash ISA rate: 4.98% (Trading 212)
• Best one-year fixed savings rate: 4.52% (Tandem Bank)
• Best one-year fixed cash ISA rate: 4.16% (Virgin Money)

^{Source: Moneyfacts as of 15 July 2025. Rates based on accounts with no minimum deposit requirements.}

Make sure to read the small print to understand whether the interest rate only applies up to a certain balance. Some accounts also include temporary bonus rates. Always remember that the interest on a variable-rate account can drop at any time. It is also important to pay close attention to any withdrawal restrictions.

Are consumers feeling stretched by rising prices?

UK households have been holding up fairly well, and many have a comfortable savings buffer. The UK household saving ratio was 10.9% in the first quarter of 2025, according to the latest ONS figures. Although inflation is above target, prices are rising far more slowly than at the peak of the cost-of-living crisis. For context, inflation hit 11.1% in October 2022.

That said, there have been a string of nasty bill hikes in recent months. ‘Awful April’ saw energy costs rise by 6.4% annually, water bills by an average 26%, and council tax bills by around 5% in most local authorities.

Energy costs have since fallen back with the new Ofgem price cap kicking in from July, but gas and electricity bills are still significantly higher than before the energy crisis.

Going forward, new pressures could emerge too. Real wages have generally been rising since mid-2022, but this could be set to change now that the economy is slowing. Businesses could look for ways to cut their wage bill to help offset the effect of higher National Insurance contributions. Some have warned that this will mean reducing employees’ hours or offering smaller annual pay rises.

Commenting after last month’s labour market report, which showed a slowdown in the rate of wage growth, Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “In this environment it’s key to take stock as soon as possible. You can’t rely on wage rises in the coming months, so you need to build a robust budget right now rather than hanging on for payday.

“It’s also worth considering what would happen if you were unable to work for a period. It’s why advisers will recommend having an emergency savings safety net big enough to cover 3-6 months’ worth of essential spending.”

See our article: “How much should I have in emergency savings?”

Thank you for following our live analysis this afternoon. We will be back tomorrow morning before the inflation figures are published at 7am. Join us then.

Welcome back

Good morning and welcome back to our inflation live coverage. June’s report will be published at 7am.

To recap, the consumer prices index rose by 3.4% on an annual basis in last month’s report, covering May. The rate of price increases is expected to either hold steady at this level or creep up to 3.5% in June.

Stick with us for live reporting and analysis.

The path of inflation

Inflation has been rising over the past eight months but remains well below the peak seen in October 2022, at the height of the cost-of-living crisis.

Consumer prices index – annual inflation rate (%)

BREAKING: Larger-than-expected inflation jump

Inflation hit 3.6% in June, up from 3.4% in May – higher than the 3.4% predicted by the Bank of England and the 3.5% predicted by some economists.

Transport costs push inflation higher

The largest upward contribution to the increase in the CPI rate came from the transport division, particularly motor fuels, the ONS said.

Although the average price of petrol fell between May and June 2025, it fell by less than a year ago.

There were also upward effects from air fares, rail fares, and maintenance and repair of personal transport equipment.

Transport costs rose by 1.7% in the 12 months to June, up from 0.7% in the 12 months to May.

Highest level of food inflation in 16 months

The rate of food inflation increased for the third month in a row, coming in at 4.5% annually. This is the highest level recorded since February 2024, but remains well below the peak of 19.2% recorded in March 2023.

Some economists, including those at Pantheon Macroeconomics, had been expecting an even higher reading of 4.7%. Poor harvests and higher employment costs have put upward pressure on food prices in recent months.

Rachel Reeves: "working people still struggling with cost of living"

Responding to this morning's inflation report, chancellor Rachel Reeves said: "I know working people are still struggling with the cost of living. That is why we have already taken action by increasing the national minimum wage for three million workers, rolling out free breakfast clubs in every primary school and extending the £3 bus fare cap. But there is more to do and I’m determined we deliver on our Plan for Change to put more money into people’s pockets."

Households should exercise caution

Rising inflation is never good news for consumer budgets – and some might be starting to tire of the ongoing gloom and doom.

Some households are still recovering from April’s bill hikes, not to mention the high levels of inflation we have witnessed over the past few years. Tax hikes look like they are looming on the horizon and the world feels like a volatile place, with Donald Trump’s trade war and geopolitical risks threatening to push inflation higher and dampen growth.

While interest rates have been coming down, they remain high, putting pressure on those with large debts and mortgages too.

“As the country waits for the next interest rate decision, falling domestic energy bills from the start of this month may ease household costs to some extent, though the energy price cap remains 10% higher than a year ago,” said Alice Haine, personal finance analyst at investment platform Bestinvest.

“For those still struggling with everyday bills or weighed down by job security concerns, keeping expenditure lower than household income is the simplest step towards a more secure financial future,” she added.

“Pausing big-ticket purchases, cancelling unwanted subscriptions, slashing non-essential expenditure, shifting expensive debts to a 0% balance transfer credit card and building up some reserve funds to cover unexpected expenses can also help to keep budgets in balance when prices remain elevated.

Deutsche Bank: “An uncomfortable print for the BoE”

Yesterday, we wrote a post on this page about the challenging tightrope the Bank of England has to walk. As well as being responsible for keeping inflation in check, the Bank needs to support economic growth.

Keeping interest rates high might help bring inflation down, but it also puts pressure on the economy. Recently, we have seen signs of a slowdown in the jobs market and two consecutive months of GDP drops. As a result, a rate cut is widely expected when the Bank next meets on 7 August.

Today’s inflation report doesn’t make life any easier for the Bank of England, though. Deutsche Bank has called it “an uncomfortable print”. The headline rate of inflation came in above the BoE’s expectations, and so did other key metrics like services inflation.

“What does this mean for the Monetary Policy Committee (MPC)? Perhaps given the focus on the labour market, tomorrow's data may hold more weight when it comes to shaping the monetary policy outlook. But today's data won't give the MPC any sense of comfort on the inflation side,” said Sanjay Raja, Deutsche Bank’s chief UK economist.

“Is an August rate cut in jeopardy? No, we don't think so. There's enough of a slowdown in GDP and the labour market to warrant a 'gradual and careful' easing of monetary policy. But the onus now rests on the labour market to shape how far and how fast the MPC can cut this year and next.”

How quickly will inflation recede?

The Bank of England thinks inflation will remain at elevated levels for the rest of the year, potentially inching up to 3.7% in September before falling back towards the 2% target in 2026. But there are a number of unknowns.

“Labour market data suggests the UK economy is now starting to struggle. A slowdown would ordinarily suppress inflation, but still-high wage inflation is muddying the waters. That metric remains inconsistent with the BoE’s 2% inflation target, at around 5%, and the extra spending power in parts of the workforce is still running counter to the wider trends of economic slowdown and job losses,” said Rob Morgan, chief investment analyst at wealth management firm Charles Stanley.

“Increases in the minimum wage and payroll tax have raised total labour costs and many businesses are passing these onto consumers. This is likely to keep inflation significantly over 3% for the rest of the year, making it difficult for the BoE to cut interest rates aggressively,” he added.

On top of this, tariffs are creating a sense of uncertainty. Essentially a tax on trade (paid by importers), tariffs are expected to push inflation higher in the US. This could have a contagion effect as other countries respond with retaliatory measures and costs are pushed up throughout global supply chains, causing inflation to rise elsewhere too.

It could also go the other way, though. If tariffs put the brakes on economic growth, the effect in the UK could be disinflationary. “At the very least the ambiguity makes it difficult for companies to plan and invest and, at worst, [tariffs] could exacerbate an economic slowdown,” Morgan said.

What does the inflation jump mean for mortgages?

Today’s inflation surprise isn’t great news for mortgage borrowers, although it is unlikely to derail the chances of an August interest rate cut, particularly if tomorrow’s labour market data shows a continued slowdown in the jobs market.

Recently, mortgage rates have been ticking downwards, reflecting the market’s confidence that there will be around two more base rate cuts before the end of the year. Market competition between lenders has helped too.

“Today’s news could take a bit of momentum out of those reductions but may not be enough to make a major reversal in those mortgage rate improvements,” said David Hollingworth, associate director at broker L&C Mortgages.

The average 2-year fixed residential mortgage rate is currently 5.03%, according to financial information company Moneyfacts. The average 5-year rate is 5.02%. Many borrowers will be able to secure a better rate by shopping around.

Mortgages: millions could see monthly repayments rise, despite falling rates

Recent drops in mortgage rates will bring little comfort to those coming off a relatively cheap deal agreed before rates started rising in 2021. Their monthly repayments are likely to jump when they refinance, as the low rate they locked in several years ago will come to an end.

Although mortgage rates are cheaper than they were two years ago, they remain significantly higher than the levels seen for more than a decade after 2008.

Around 1.6 million fixed-rate deals are due to come to an end in 2025, according to trade association UK Finance. Meanwhile, the Bank of England has calculated 3.6 million mortgages are due to be renegotiated during the next three years, amounting to 41% of all outstanding home loans.

Those who are about to come off their previous deal will be hoping for further base rate cuts, but it is worth pointing out that mortgage rates don’t always tumble in tandem with the base rate.

Fixed-rate mortgage deals are priced based on swap rates – another kind of financial instrument. These can move up and down based on other factors like inflation, bond yields and growth expectations.

“Accurate forecasting is going to be tricky, so if you are remortgaging, it pays to lock in a rate as soon as possible – a few months before your deal ends,” said Sarah Coles, head of personal finance at Hargreaves Lansdown.

“That way, if rates rise between then and the end of your deal, you have secured a great rate, and if they fall, you can shop around for a better deal elsewhere.”

Just make sure you read the small print carefully to understand the deadlines and any fees you might lose when ditching a deal.

How have markets responded to June’s inflation jump?

The FTSE 100 has shrugged off this morning’s inflation jump, opening 0.1% higher. The mid-cap FTSE 250, which is more exposed to the domestic economy, fell 0.2%.

UK equities have had a strong year so far in 2025. The FTSE 100 reached a record high on Tuesday, crossing the 9,000-point mark for the first time.

Volatility in the US has prompted some investors to look elsewhere in search of a more diversified opportunity set in recent months. The UK looks undervalued compared to its US and global counterparts, having been unloved since Brexit, making it an attractive proposition to some investors.

As long as we don’t experience a significant growth slowdown, further interest rate cuts could act as a tailwind for equity markets. Most economists expect two more rate cuts from the Bank of England before the end of the year.

When borrowing costs fall, it reduces the burden of debt for businesses, which can help boost investment and profitability. It also eases pressure on consumers, making them more likely to spend money.

Of course, uncertainties remain. If interest rates are kept restrictive for too long, it can hurt economic growth, resulting in a more challenging environment for businesses. Trump’s trade war could also dampen growth, as could an escalation of the conflict in the Middle East, particularly if it were to result in a sustained increase in oil prices.

“Parts of the gilt market may need to adjust”

Long-dated bonds which mature many years in the future are more exposed to inflation and interest rate risk than short-term bonds. These longer-dated parts of the market could be at risk of a sell off, according to some analysts.

“The persistence of inflation above 3%, well ahead of the Bank of England’s 2% target, highlights the risk that higher inflation is here to stay, and parts of the gilt market need to adjust,” said James Flintoft, head of investment solutions at AJ Bell.

“This comes at a time when there are widespread concerns over the UK’s fiscal path, with the Mansion House speech last night providing little clarity on the situation ahead of the Autumn Budget.

“On top of that, a recent report from the Office for Budget Responsibility highlighted that UK pension schemes, typically a strong supporter of the gilt market, are expected to be selling gilts over the next decade, adding upward pressure to gilt yields.”

In Flintoft’s view, investors holding gilts (traditionally seen as a safe-haven asset in times of volatility) may need to check they are holding the right part of the market. Short-dated bonds could be a safer bet than long-dated ones.

“AJ Bell’s funds use a combination of shorter-dated gilts and US Treasuries to combat the risk that longer-dated bond yields need to move higher, meaning bond prices fall to compensate investors for inflation and fiscal uncertainty,” he said.

“We also hold shorter-dated US TIPS (Treasury Inflation Protected Securities) to help offset inflation in the US, which is also above target and showing the first signs of upward pressure from President Trump’s tariffs.”

What’s happening with house price inflation?

House price data is also published each month on inflation day. Each report from HM Land Registry is released with a six-week time lag, meaning today’s figures cover the 12 months to May.

House prices rose by 3.9% on an annual basis in May, up from a revised estimate of 3.6% in April. It brings the average UK property to £269,000.

“This marks a modest acceleration in annual growth, though it follows a period of volatility when house price inflation slowed as a result of Stamp Duty Land Tax (SDLT) changes introduced in April,” said Holly Tomlinson, financial planner at wealth management firm Quilter.

On a monthly basis, house prices rose by 1.1%.

What does an inflation jump mean for retirees?

A jump in inflation is bad news for retirees as it erodes the value of their pension savings.

Defined contribution pensions do not come with inflation protection, unlike older-style defined benefit schemes. Similarly, those who decide to buy an annuity in retirement could see their income diminished in real terms, if they opt for a level annuity rather than an inflation-linked product.

“Annuity incomes have inched down slightly but are currently delivering good value – a 65-year-old with a £100,000 pension can currently get up to £7,793 per year from a single-life level annuity with a five-year guarantee,” said Helen Morrissey, head of retirement analysis at Hargreaves Lansdown.

“This may seem like enough to meet your needs, but given that level annuities don’t increase, you need to think about whether it’s going to give you what you need over the long term. A spike in inflation could do real damage to your budget.”

The downside with inflation-linked products is that the starting incomes are much lower. Data from Hargreaves Lansdown shows an annuity that escalates by 3% per year gives a starting income of up to £5,789, assuming the same criteria as before.

Private pension income is an important part of most people’s retirement plan, but the state pension also plays an integral role. The good news is this is protected from inflation by the triple lock guarantee. This increases payments each year in line with inflation, wage growth or by 2.5% – whichever is highest. The government has promised to keep this policy in place for at least the duration of this parliament.

Thank you for joining us – plus, some dates for your diary

For those who are following the latest inflation news with interest, here is a list of upcoming CPI report dates for 2025:

• 20 August (covering July)
• 17 September (covering August)
• 22 October (covering September)
• 19 November (covering October)
• 17 December (covering November)
• 21 January 2026 (covering December)

And with that, we are wrapping up our inflation coverage for the day. Thank you for following along.

We will be back again next month, reporting live on the Bank of England's interest rate decision on 7 August. The MPC is widely expected to cut rates. Join us for reaction and analysis.

Summary

• The Office for National Statistics (ONS) released UK inflation data for the year to May 2025 today (18 June);
• CPI hit 3.4% for May, in line with expectations and down slightly from the previous month;
• Slowing transport inflation offset a rise in furniture and household goods prices;
• Chancellor Rachel Reeves says there is "more to do" to bring inflation under control;
• The Bank of England (BoE) expects inflation to rise to 3.7% by September;
• The Consumer Prices Index (CPI) measures changes in the cost of everyday goods and services;
• CPI jumped to 3.5% in April.

| What is inflation? | CPI versus RPI inflation | Upcoming CPI release dates |

Good afternoon and welcome to MoneyWeek’s rolling coverage of the latest UK inflation figures.

With the release of May inflation data scheduled for tomorrow morning (18 June), we’ll bring you live previews of the announcement, as well as rolling coverage and reaction after the release.

What do analysts expect for UK inflation in May?

Analysts at the Bank of England (BoE) expect the headline CPI figure to come in at 3.4% for May, down slightly from its April reading. The consensus expectation among analysts polled by FactSet is slightly higher at 3.5%.

That suggests inflation will remain well above the 2% figure that the Monetary Policy Committee (MPC) targets.

BoE forecasts currently project inflation to increase to 3.7% in September. However, inflation is then expected to fall to around 2.4% by Q2 2026.

When is May UK inflation data announced?

The Office for National Statistics (ONS) will release May inflation data tomorrow morning (18 June) at 7am.

Join us live then for breaking news on the headline figures as well as deeper analysis of the report.

What is the Consumer Prices Index?

The Consumer Prices Index (CPI) is the official measure of inflation that policymakers and analysts tend to focus on. Most central banks, including the BoE, target a CPI rate of 2%.

It isn’t the only measure of inflation, though. There is also the Retail Prices Index (RPI), which includes costs of home ownership as well as the prices measured by CPI.

There is also the Consumer Prices Index including owner occupiers’ housing costs (CPIH). This measures inflation with the costs of owning, maintaining and living in a home included – as such, it has similar characteristics to RPI. While the methodologies used to calculate each are currently different, the two will be fully aligned from February 2031.

Read more about the different inflation metrics here: CPI versus RPI inflation.

Why May inflation might be lower than expected

While the BoE expects inflation to come in at 3.4%, economists at Oxford Economics are expecting CPI to come in slightly lower at 3.3%.

“April's surprisingly strong reading in the services category should partially unwind in May's data,” said Edward Allenby, economist at Oxford Economics. “This is because the outturn was artificially boosted by an unusually large increase in vehicle excise duty sub-category, which the Office for National Statistics has since revealed was due to an error in the data supplied by the Department for Transport and will be corrected in May's release.

“Furthermore, April's rise in services prices was also exaggerated by a very high reading in the air fares sub-category, as the month's collection dates coincided with the Easter holiday unlike in 2024. The upward pressure from this effect should also unwind in May's data. We expect minimal movements in the other major inflation categories.”

Charles Stanley: households are feeling the strain of inflation

Monthly inflation data reports give all sorts of information to policymakers, particularly those involved in setting interest rates. That in turn has a knock-on effect on various other important areas of your finances, like mortgage rates or the performance of the stock market.

But inflation is felt by everyone far more keenly and directly than this, in real-time, because it is a direct measure of how much we pay for the goods and services we use everyday.

The jump in inflation during April, to 3.5% from 2.6% in March, reflected a ramping up of these costs.

“Household finances are under renewed strain,” says Rob Morgan, chief investment analyst at Charles Stanley. “Although average wages have been trending higher, mounting expenditure on bills and groceries, plus higher mortgage costs for many thanks to higher interest rates, means extra income is typically spent on essentials rather than saved.”

April’s figure was elevated by the impact of increased employer costs, such as higher minimum wages and National Insurance payments. The hope is that the impact of these will fade over time.

“While services inflation stands to remain elevated in the short term thanks to increased employer costs, it is a factor that should fade as the months roll by as companies scale back hiring and restrain pay where possible,” says Morgan.

Read more about what inflation is and how it affects you here: What is inflation?

Good morning, and welcome back to our UK inflation live blog. Just under 15 minutes to go until the ONS releases the latest inflation data.

As a reminder, most observers expect inflation to have been around 3.4% in the 12 months to May. Stay here for live updates as it happens.

BREAKING: Inflation hit 3.4% during May

The ONS has released May’s inflation data, and the headline CPI figure comes in at 3.4% for the 12 months to then.

CPIH, which includes the costs of owning, maintaining and living in a house, hit 4.0%..

More detail and analysis on the way.

Transport pricing mitigates food and furniture inflation

That slight easing in headline inflation rates between April and May appears to have been driven largely by a slowdown in transportation price rises.

Transport costs increased 3.3% in the year to April, but just 0.7% in the year to May.

That offset an increase in prices of furniture and household goods, which fell 0.5% in the year to April, but rose 0.8% in the year to May.

ONS chief economist: inflation "little changed in May"

“A variety of counteracting price movements meant inflation was little changed in May,” said Richard Heys, acting chief economist at the ONS.

“Air fares fell this month, compared with a large rise at the same time last year, as the timing of Easter and school holidays affected pricing. Meanwhile, motor fuel costs also saw a drop.

“These were partially offset by rising food prices, particularly items such as chocolates and meat products. The cost of furniture and household goods, including fridge freezers and vacuum cleaners, also increased.”

Other May inflation metrics

As a recap, headline CPI inflation came in at 3.4% over the 12 months to May; in other words, consumer prices according to this methodology were 3.4% higher in May 2025 than a year before. Likewise. CPIH (which includes home ownership and maintenance costs) was 4.0%.

Core CPI – a variant of the headline metric which excludes energy, food, alcohol and tobacco (as these are typically more volatile) increased 3.5% in the 12 months to May, down from 3.8% the month before.

Encouragingly, CPI services inflation slowed considerably from 5.4% in April to 4.7% in May.

Compared to the month before, CPI rose by 0.2% in May 2025.

Easing CPI inflation is “good news” for Reeves but rising food costs a concern

“Easing inflation may be relatively good news for chancellor Rachel Reeves who bangs the drum of stability, but prices remain elevated and well above the Bank of England’s target of 2%,” said Alice Haine, personal finance analyst at Bestinvest, an online investment platform from Evelyn Partners.

“The main driver behind the lower headline rate was falling transport inflation, a reflection of falling air fares after the Easter break and an error in the tax figures provided by the Department of Transport for the ONS’s April inflation data,” Haine adds.

“Worryingly, food inflation bucked the trend and rose to 4.4% from 3.4% in April as supermarkets came under pressure from rising costs.”

Reeves responds to May inflation figures

The chancellor of the exchequer, Rachel Reeves, has responded to today’s inflation reading.

“Our number one mission is to put more money in the pockets of working people,” Reeves said. “We took the necessary choices to stabilise the public finances and get inflation under control after the double digit increases we saw under the previous government, but we know there’s more to do.”

Reeves' statement highlights last week’s £3 bus fare cap extension and increase to free school meals. “This government is investing in Britain’s renewal to make working people better off,” Reeves said.

Middle East turmoil could push inflation higher

While higher food and drinks costs have impacted May’s headline CPI figure, the real danger ahead could be the impact of the brewing conflict in the Middle East on energy prices, according to Nicholas Hyett, investment manager at Wealth Club.

“The net result is that UK inflation remains high, and far higher than elsewhere in Europe,” said Hyett. “That is unwelcome but not unexpected.

“The hope was that price increase would slowly roll off over the course of the next 12 months as we annualise things like council tax hikes and the effect of April's higher labour costs. The turmoil in the Middle East has upset that.”

Oil prices are on the rise as a result of the turmoil, and Hyett highlights that global energy flows could become disrupted if the conflict expands.

“As a key input into pretty much everything, a spike in oil would drive up prices across the board.”

Correction means inflation effectively held steady in May

As expected, today’s release has included a revision to last month’s headline figure as a result of an error in the Vehicle Excise Duty (VED) component, which added 0.1 percentage points onto the headline rate last month.

Once that is accounted for, “inflation in May effectively held steady”, said Myron Jobson, senior personal finance analyst at Interactive Investor.

“Looking beyond the headline figure, core inflation… eased as expected,” Jobson added. “It is important to remember that inflation affects everyone differently.

“We all have a personal inflation rate because our spending habits vary. Depending on the goods and services you buy, your personal inflation rate may be lower - or higher - than the headline figure.”

How does inflation affect your savings?

Inflation has a knock-on effect on all sorts of aspects of your personal finances. It will impact the rate at which certain fixed bills, like your broadband or phone contract, increase each year. Because it informs interest rate decisions, higher inflation can also lead to higher mortgages, as well as higher interest rates on your savings.

While that may sound like higher inflation is good news for savers, the opposite is true. Higher inflation eats into the spending power of the interest that your cash generates.

Many people are unaware of this. Research from Tesco Bank showed that 39% of people are unaware of the impact of inflation on their savings. Within that group, 21% said they didn’t know what impact inflation has on their savings, while 11% believe that higher inflation increases the value of their savings.

“When the rate of inflation is on the up, it means the costs of things in our everyday lives are going up. In turn, our money, and our savings, don’t stretch as far as they once did,” said Chris Henderson, savings and payments director at Tesco Bank.

“While there is no fail-safe way to protect your money from inflation, making sure you are getting the best interest rate on your savings can help,” Henderson added.

The fact that the Bank of England is engaged in an interest rate cutting process further dampens the prospects for savings in the foreseeable future.

“Savers are facing a squeeze,” said Sally Conway, savings expert at Shawbrook. “Inflation is sticking, everyday costs are still rising – and interest rates on many savings accounts have been coming down. With further rate cuts expected, the opportunity to lock in higher returns may not last much longer.”

May inflation recap

Just to recap, here are the headline inflation figures following this morning’s release:

^{Source: Office for National Statistics}

Why inflation is likely to stay high over the summer

The 3.4% headline CPI figure announced today tracks changes in prices over the last 12 months.

So, all 12 data points in that time period will inform the next reading. High-inflation months, where prices rose relatively fast month-over-month, skew the CPI average upwards, while lower-inflation months do the opposite.

There’s some bad news on that front. The monthly inflation increases in June and July 2024 were both very low – July’s, in fact, was negative. These are currently holding the headline annual inflation rate down.

“As these two numbers fall out, the 12-month average will likely increase, hence inflation staying elevated over the summer months,” says Rory McPherson, chief investment officer at Wren Sterling.

As the BoE expects, though, this impact will be transient. “Once that’s passed, we assume a more normal trajectory and then in November (when that big 0.6% reading for October 2024 drops out), we should start to trend down,” McPherson explains. The upshot, he believes, is that “this will likely mean that UK inflation stays above 3% for some time to come before falling back towards 2%”.

How could the Middle East conflict impact inflation?

A slowdown in transport inflation helped keep May’s CPI figure little changed despite rising food prices.

However, George Lagarias, chief economist at Forvis Mazars, fears that this reprieve could be short-lived given the conflict threatening to escalate between Israel and Iran.

“With the war in the Middle East pushing energy prices higher, that transportation offset might very well disappear by the next month,” he says. “Consumers are beginning to feel the heat of inflation again.”

Inflation: the outlook

Today’s inflation reading has changed little in the minds of most experts. September is still expected to see the peak of UK inflation this year.

“Looking ahead, we expect headline inflation to rise gradually in the coming months, and peak in September,” said Edward Allenby, UK economist at Oxford Economics. The BoE’s estimates put inflation peaking at around this time at approximately the 3.7% level.

“From the autumn, inflation is likely to cool as the positive contribution from the energy category disappears," says Allenby. The energy price cap is falling by around 7% for a typical household from 1 July. This reduction in energy prices “should outweigh the impact of sticky services inflation” according to Allenby.

Oxford Economics expects UK inflation to average 3.3% this year, falling to 2.6% in 2026.

What’s happening with housing inflation?

Consumer price inflation wasn’t the ONS’s only inflation announcement today. We’ve also had a separate update on private rent and house price inflation.

In the 12 months to May 2025, average UK monthly private rents increased by 7.0% to £1,339. This rate of inflation is down from 7.4% in the 12 months to April.

“Rental inflation is slowing as demand cools on lower migration and improved affordability for first time buyers rather than any increase in rent supply,” said Richard Donell, executive director of research at property website Zoopla. “We expect the rate of rental inflation to slow in the coming months which will be welcome news for renters.

Average UK house prices increased by 3.5% to £265,000 in the 12 months to April (house price figures typically lag rent and consumer price data by one month). That’s down significantly from 7.0% in the 12 months to March.

“The big decline in the rate of house price inflation reflects the ending of the stamp duty holiday which is now filtering through into slower price growth,” says Donnell. “We expect the rate of price growth to slow further over 2025 as home buyers face a large choice of homes for sale which will support a buyers market.”

Thanks for following

Thanks for following our inflation live blog. We’re going to leave inflation coverage here and instead turn our attention towards tomorrow’s key MPC meeting that will determine interest rates.

How will the MPC digest today's inflation news? Katie Williams will bring you all the answers here.

Summary

• UK inflation hit 3.5% in April, according to this morning's report from the Office for National Statistics (ONS). This is the highest level in over a year.
• The Bank of England had been forecasting a 3.4% reading.
• “Awful April” is largely to blame, with a range of bills going up in April each year, including energy bills, water bills and council tax.
• The inflation report comes less than two weeks after the Bank of England announced its latest interest rate cut, bringing the base rate to 4.25%.
• Since then, the Bank’s chief economist Huw Pill has warned that interest rate cuts have been coming “a little too fast” given developments with inflation.
• Pill voted against the recent cut but was outnumbered by other committee members.

| What is inflation? | CPI versus RPI inflation | Upcoming CPI release dates |

April’s inflation figures due tomorrow

Good afternoon and welcome to our live blog. April’s inflation data will be published tomorrow morning at 7.00am. Brace yourself for a significant jump. The Bank of England thinks the headline rate will rise to 3.4%, up from 2.6% last month.

This would be the fastest rate of annual CPI inflation in over a year. The last time the inflation rate was this high was in February 2024. The good news is that it is expected to be short-lived.

In its latest monetary policy summary, the Bank of England said that “previous increases in energy prices” were “likely to drive up CPI inflation from April onwards”, but that it was “expected to fall back thereafter”.

By this time next year (Q2 2026), the Bank expects inflation to have fallen back to around 2.4%. By the second quarter of 2027, it expects it to be 1.9%. This is below the all-important 2% target.

“Biggest test for the MPC so far this year”

“After an encouraging March report, the April inflation reading will present the biggest test for the MPC so far this year,” said Sanjay Raja, chief UK economist at Deutsche Bank. April’s bill hikes are likely to have pushed the overall inflation rate higher, as well as a later-than-usual Easter weekend. The biggest test will come from elsewhere, though.

The Bank will be watching to see “how the double whammy of the National Living Wage and employer National Insurance Contributions impact price momentum”, Raja said. “We think food, core goods and some services (particularly hospitality and leisure) will be most impacted.”

What about core and services inflation?

The headline rate of CPI inflation is the most commonly-reported metric, but the Bank of England also keeps a close eye on core and services inflation.

• Core CPI excludes volatile measures such as energy, food, alcohol and tobacco. It can give a better sense of how embedded inflation is in the economy.
• Services inflation tells you how much things like educational costs, hospitality costs, and recreational costs have gone up or down. Around 80% of the UK economy is made up of services.

Deutsche Bank thinks core CPI will jump to 3.7%, up from 3.4% last month. It thinks services CPI will rise to 4.9%, up from 4.7%.

ING: “April is always a crazy month for UK inflation”

The economists at financial institution ING think the Bank of England can relax.

UK economist James Smith points out that “April is always a crazy month for UK inflation” because of the annual bill hikes that take place. When you put this to one side, pricing power more generally “seems to be fading”.

“We think the news on services inflation is about to get better. We believe it will be half a percentage point lower by June (roughly 4.2%), well below the BoE’s forecasts, which see it hovering around 5% into the summer,” he added.

This drop will be partly linked to slower rental growth, in ING’s view.

ING also points out that services inflation looks much better when you strip out volatile categories like airfares, holidays and rents. This underlying measure, which ING terms “core services inflation”, is “already tracking at 4% and is likely to head lower over the next few months”, Smith said.

As we established in a previous post, services inflation is an important metric for the Bank of England, because services make up around 80% of the UK economy.

Against this backdrop, ING thinks the Bank could end up cutting rates to a lower level than the market currently anticipates. “Markets are pricing the terminal rate at 3.7%,” Smith said. “We're expecting rates to eventually fall to 3.25%.”

Huw Pill on “the courage not to act”

The Bank of England’s chief economist Huw Pill sounded a more cautious tone in a speech delivered before Barclays today.

He expressed the view that rate cuts have been coming “a little too fast of late”, and defended his “hold” vote earlier this month by talking about “the courage not to act”.

Pill still believes the disinflationary process is intact, but favours a more gradual pace of cuts.

“I am concerned about the potential inflationary impact of structural changes in price and wage-setting behaviour, following the experience of prolonged, well above-target inflation in recent years,” he said.

This could potentially include workers continuing to demand higher pay, or companies continuing to hike prices for longer.

Against this backdrop, Pill believes the quarterly pace of rate cuts we have seen since last summer is too rapid.

What could April’s tax changes mean for inflation?

One thing economists will be watching over the coming months is the impact of recent tax changes on the inflation data.

Chancellor Rachel Reeves raised the rate of employer National Insurance contributions in her Autumn Budget last year. She also lowered the threshold at which employers begin paying the tax. These changes came into effect at the start of the new tax year in April.

A survey of 52 leading retailers, conducted by the British Retail Consortium (BRC) earlier this year, showed two-thirds of businesses were considering raising prices to help offset the cost of the changes.

“Retailers have worked hard to shield their customers from higher costs, but with slow market growth and margins already stretched thin, it is inevitable that consumers will bear some of the burden. The majority of retailers have little choice but to raise prices in response to these increased costs,” said Helen Dickinson, BRC chief executive.

How does inflation affect your cash savings?

With tomorrow’s inflation figures expected to be the highest that the UK has seen in over a year, now is a good time to assess whether your cash savings are doing enough.

Inflation eats away at the purchasing power of your money – as prices rise, your money will not stretch as far as it did before. That’s why it is important to make sure it is growing in one of the best savings accounts.

While you may think this won’t affect you, it is still worth checking.

Recent research from Paragon Bank revealed that 55% of the UK population has money languishing in low-interest savings accounts, with billions of pounds being eroded by inflation.

For example, if inflation was at the Bank of England’s target of 2% and your money was held in a current account accumulating no interest, then your cash would be 2% less powerful.

However, if you instead put that money into a savings account that yielded 2% interest, your money would keep pace with inflation, keeping your purchasing power the same.

Don’t be content with just matching inflation. After a period of high interest rates, many savings accounts offer inflation-busting rates.

The best cash ISA on the market right now, Moneybox’s cash ISA, can grow your savings by 5.71%. When you subtract last month’s inflation reading of 2.6% from this figure, you are left with a real return of 3.11%.

– Daniel Hilton, junior writer

That concludes our preview analysis for today, but we will be back tomorrow morning before the inflation news breaks at 7.00am. Join us then.

Welcome back – less than half an hour to go

Good morning and welcome back to our inflation live blog. There is less than half an hour to go until April’s inflation figures are released. To recap, a big jump is expected following the slew of bill hikes throughout the month.

Stick with us as we bring you all the details, plus what it means for your personal finances.

Recap: which bills went up in April?

April is the main month of the year when household bills go up, and this is expected to contribute to the significant rise in the rate of inflation in this morning’s report. Some of the main price hikes this April included:

• Energy: The typical energy bill rose by £111 per year this April.
• Water: The typical water bill rose by £123 per year.
• Council tax: Council tax bills rose by almost 5% across most local authorities in England, with some councils getting special permission to hike costs by up to 9.99%.

Other services like broadband and mobile phone contracts can see price hikes in April. Depending on when you took your contract out, these can be linked to a previous rate of inflation. Car tax is another example of a cost that went up during the month.

BREAKING: Inflation jumps to 3.5%

Inflation jumped by more than expected, hitting 3.5% in April, up from 2.6% the month before.

Inflation higher than the BoE anticipated

The latest reading is the highest since January 2024. It is also slightly higher than the 3.4% the Bank of England had anticipated. A June interest rate cut was already looking unlikely. This makes it even more so.

Significant jumps in core and services inflation

Core and services inflation also saw big jumps in this morning's report. Core inflation rose from 3.4% to 3.8%, while services inflation rose from 4.7% to 5.4%.

For context, the economists at Deutsche Bank were predicting 3.7% (core) and 4.9% (services), so both forecasts fell short.

These jumps are likely to encourage caution from the Bank of England when it meets again next month to set interest rates.

Housing and household services – the biggest contributor

Unsurprisingly, housing and household services were the biggest contributors to April's inflation jump. The 12-month inflation rate for the sector was 7% in April, up from 5.1% the month before.

Hikes to gas and electricity bills were a key driver, after the Ofgem energy price cap rose by 6.4% at the start of the month.

For the average household paying by direct debt for gas and electricity, this pushed the typical bill up by £111 per year to £1,849.

Water bills added to soaring costs

Water bill hikes were another contributor to April's inflation rise, also captured within the "housing and household services" segment.

"Prices of water and sewerage rose by 26.1% in the month to April 2025 compared with a rise of 8.1% a year ago. This is the largest rise since at least February 1988," the ONS said.

Transport costs pushed higher by car tax and a late Easter

After housing and household services, the transport sector was the biggest contributor to April's inflation jump.

Car tax changes were partly to blame, after some of the rates paid by new petrol and diesel cars doubled in April. Electric vehicles also became eligible for the tax this April.

A late Easter was another factor, resulting in higher airfares being captured in the dataset this month. Airfares rose by 27.5% on a monthly basis, up from 6.5% in the same month a year ago. This is the second-highest monthly rise for April since records began.

"Flights departing in the Easter holidays tend to be more expensive than flights not departing in the Easter holidays," the ONS explains.

"Index day occurred during the Easter holidays in 2025, which made every flight more expensive. However, in 2024 index day occurred after the Easter holidays."

Did the National Insurance hike make a difference?

As we outlined in our preview analysis yesterday, some analysts thought recent changes to employment costs could contribute to a higher rate of inflation this month.

Chancellor Rachel Reeves hiked employers' National Insurance contributions in her Autumn Budget last year, with the changes kicking in this April. Higher minimum wage levels also came into effect.

Some businesses indicated that they were looking to raise their prices in response, to help offset the higher costs now associated with employing workers.

Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, thinks we could be starting to see evidence of this already.

He said: "Rising services and core inflation suggest that the double blow for businesses from the rising National Insurance and National Living Wage has further fuelled underlying price pressures, more than offsetting the downward squeeze from a wilting labour market."

What does the inflation jump mean for your personal finances?

An inflation jump will come as bad news to households up and down the country, but the good news is that you have probably already absorbed the worst of the price increases. Higher bills will have shown up in your account for the first time last month.

The Bank of England doesn't expect this resurgence in inflation to last for long, and it thinks it will peak in the third quarter of this year at around current levels (3.5%).

What's more, there is no suggestion that we are heading back to the darkest days of the cost-of-living crisis, when the annual rate of price increases peaked at 11.1%.

That said, it is also worth pointing out that a slowdown in inflation after this point (Q3 this year) doesn't mean prices are expected to fall overall. They are just expected to rise at a slower rate, closer to the Bank of England's target of 2%.

Unless your wages have kept pace with inflation, this means your purchasing power will have been eroded.

"Personal budgets may come under pressure once again"

"Anyone fortunate enough to have received a pay rise in recent months may have seen a large chunk of that pay increase swallowed up the sharp hikes in household bills and tax – a result of frozen income tax thresholds, which are set to stay firmly in place until at least 2028," said Alice Haine, personal finance analyst at investment platform Bestinvest.

There should be some good news on the horizon when it comes to energy bills, though. As Haine points out, these are one area where price drops are expected over the summer. After rising by 6.4% in April, the Ofgem energy price cap is expected to drop by 7% in July, according to the latest forecasts from consultancy Cornwall Insight.

Haine says it probably won't be enough to move the needle for those suffering the most, though.

"For those still struggling with everyday bills, reviewing budgets to ensure expenditure comes in lower than household income is the simplest strategy, though that can be hard to achieve in reality," she said.

"Putting big-ticket purchases on pause, carrying out an audit of subscriptions and direct debits to cut any wasteful expenditure, and shifting expensive debts onto a 0% balance transfer card are some strategies consumers can employ to keep budgets on track as prices tick up."

Bad news for mortgage rates

Today's larger-than-expected jump in inflation could come as bad news to those looking to take out a mortgage or refinance their debt at the end of a fixed-rate period.

While an inflation jump was widely anticipated – and priced in by markets – the headline figure came in slightly above the 3.4% forecast by the Bank of England.

Core and services inflation were higher than many analysts had predicted too. This could keep the Bank of England cautious, with the base rate potentially staying higher for longer.

Swap rates, which underpin mortgage pricing, often rise when inflation surprises to the upside to reflect this dynamic.

The average two-year fixed mortgage rate is currently 5.11%, according to Moneyfacts. The average five-year deal is 5.07%. Borrowers can usually secure a better rate by shopping around.

"Stagflation is a central banker’s living nightmare"

While a jump in inflation was widely anticipated in today's report, the headline figure was higher than the Bank of England had predicted.

"Even more worrying is the jump in services prices," said George Lagarias, chief economist at financial services company Forvis Mazars.

He calls stagflation a "central banker's living nightmare", and adds that the MPC will now need to choose "whether to support growth or fight inflation by further risking the growth outlook".

The UK economy proved surprisingly resilient in the first quarter of 2025, growing by 0.7%, however many fear that a slowdown is coming, partly driven by the global economic fallout from Trump's tariffs.

Savers facing a double hit of falling rates and rising inflation

The latest inflation reading of 3.5% means fewer savings accounts will now be offering a real return. Check your rate to ensure you are matching inflation, at the very least.

A comparison tool can help you work out whether switching could earn you a better deal.

"Those in low-paying accounts should consider looking beyond mainstream banks," said Sally Conway, savings expert at Shawbrook Bank.

"Specialist providers often offer better returns – and switching could deliver a meaningful boost to your interest income. With rates expected to fall further this year, fixing savings for a year or more could help lock in better value for longer."

See our round-up of the best easy-access rates, one-year savings accounts, regular saver accounts and cash ISAs for the latest deals on cash savings.

House prices rise by 6.4% annually

It's not just the Consumer Prices Index that is published today, but also the latest house price inflation data from HM Land Registry.

The figures, published a few minutes ago at 10am, cover the year to March, as Land Registry data comes with a two-month time lag.

House prices rose by 6.4% on an annual basis in March, and 1.1% on a monthly basis, as buyers rushed to complete a purchase before stamp duty changes kicked in at the start of April.

This is a significant rise compared to the previous report, where the annual figure came in at 5.4%, and the monthly figure at 0%.

March's increase takes the average UK house price to £271,000.

How have investment markets reacted to the latest inflation data?

Returning now to the CPI report, how have investment markets responded?

Higher-than-expected inflation is usually bad news for investors. As well as eroding the real value of their returns, it pushes up costs for businesses and squeezes their margins.

If inflation proves more persistent than expected, interest rates could stay higher for longer too. This also creates challenges for businesses by making it more expensive for them to borrow money. Companies may struggle to invest in future ventures during periods like this.

High inflation and borrowing costs are usually bad news for consumers as well – and a weak consumer is no good to businesses, who want you to spend money.

Commenting on this morning's inflation print, Susannah Streeter, head of money and markets at Hargreaves Lansdown said: "The FTSE 100 has struggled to cling onto gains as investors get to grips with hotter-than expected UK inflation figures and rising geopolitical risks.

"Sterling has risen amid expectations that the hotter inflation number will make policymakers that bit more inclined to keep interest rates higher for longer.

"Financial markets have reduced expectations for rate cuts this year, with only one reduction looking bolted on. As the pound flexes more muscle it adversely affects the value of multinationals overseas earnings, which is putting pressure on the FTSE 100."

The importance of emergency savings

Costs are rising more quickly and the economy is showing signs of weakening, including lower wage growth and higher unemployment figures. There have also been mutterings of layoffs as businesses adjust to higher employment costs.

Against this backdrop, some households might be feeling nervous – but there are steps you can take.

"Building a reliable cash pot to fall back onto is crucial, especially with persistent sticky inflation eating its way into savers’ deposits," said Caitlyn Eastell, spokesperson at Moneyfacts.

"Research conducted by the Financial Conduct Authority (FCA) has revealed that one in 10 people have no cash savings and another 21% have less than £1,000. Ongoing cost-of-living pressures mean consumers need to shake any apathy aside and start building a healthy habit that provides attractive returns to avoid receiving a raw deal," she added.

This is easier said than done, but setting up a direct debit to save even £50 or £100 a month is a good start.

See our guide on how much you should have in emergency savings based on your circumstances. Knowing how much you need can give you a target to work towards.

Have interest rate expectations shifted?

Today’s inflation reading was higher than expected. The headline figure of 3.5% was above the 3.4% forecast by the Bank of England, and marked a nasty increase from March’s reading of 2.6%.

Core inflation also jumped from 3.4% to 3.8%, while services inflation rose from 4.7% to 5.4%.

What does this mean for interest rate projections?

• Markets: Investors have adjusted their interest rate expectations to price in fewer cuts. Only one reduction now looks bolted on this year based on market pricing, according to data cited by Hargreaves Lansdown.
• Economists: Economists on the other hand are generally holding firm. Investment bank Peel Hunt still expects two more cuts before the end of the year. ING is also forecasting two, with cuts still coming at a quarterly pace. Deutsche Bank is also sticking to its forecast of three more cuts in 2025.

“Does the April surprise change our view that the BoE will cut the Bank Rate two more times this year – by 25bp each in August and November? Not much,” said Kallum Pickering, chief economist at Peel Hunt.

“Looking further ahead, the BoE (and we) expect underlying disinflation to continue – helped by growing slack in the labour market, recent declines in energy prices (which should contribute to a lower household energy price cap in July), a stronger currency (which lowers import prices), and the potential for the diversion of goods into Europe from China in the wake of US tariff measures to lower the prices of some imported goods.”

Pickering does think the latest news eliminates any chance of a rate cut in June, but the odds were already slim even before today’s report.

Is inflation as bad as it looks?

Deutsche Bank argues that some elements of the CPI report can be taken with a pinch of salt. It points to the spike in airfares as one example. This was largely driven by a later-than-usual Easter.

The bank says that “a lot will reverse in May”, while one-off increases in things like car tax will “wash out of the CPI calculation eventually”. It also thinks the MPC can find solace in other areas of the report.

Housing costs and health services both undershot Deutsche Bank’s forecasts. Meanwhile, recreational and personal services were in line with expectations, and suggested “very little surprise in NICs, and likely less than what the Bank staff pencilled in”.

Deutsche Bank points out that catering prices “only” rose by 0.6% month-on-month, for example, while accommodation prices rose by just 0.34%.

Could the BoE ignore the increase in services inflation?

The scale of the increase in services inflation in April was unexpected, jumping from 4.7% to 5.4%. However, when you delve into the data, it isn’t as bad as it looks.

“We calculate that half of that change was solely down to the rise in road tax,” said James Smith, UK economist at ING.

“That will stick around for the next 12 months, then drop out of the annual comparison. The Bank of England will almost certainly ignore this, as it does with changes in other taxes like VAT.”

The remainder of the increase can “almost entirely” be accounted for by the surge in airfares and packaged holiday costs, Smith points out. This is largely the result of Easter coming later than usual this year.

As the ONS noted in its report, index day occurred during the Easter holidays this year, when things like flights are generally more expensive.

Given the nature of items like airfares and holidays, the Bank of England is generally less concerned about them anyway. As such, it could decide to look through the increase in services inflation when determining the path for monetary policy going forward.

That concludes our inflation coverage for today. Thank you for joining us. We will be back again next month with more live reporting and analysis. In the meantime, here are some important economic dates for your diary.

• 10 June: Labour market report
• 12 June: GDP monthly estimate (covering April)
• 18 June: CPI report (covering May)
• 19 June: MPC meeting

Summary

• UK inflation slowed to 2.6% in March, down from 2.8% in February.
• The reading came in lower than analysts had forecast. Estimates pointed to a reading of 2.7%.
• A drop in the inflation rate does not indicate that prices fell in March, but that they rose at a slower rate.
• The slowdown could be short-lived though. Inflation is expected to jump to 3.6% in April, according to Bank of England forecasts.
• This could create a short window of opportunity for the Monetary Policy Committee (MPC) to cut interest rates when it next meets on 8 May.
• Earlier this month, markets started forecasting a faster pace of interest rate cuts as Donald Trump’s trade war heated up.

MoneyWeek is reporting live on today's inflation report. Scroll for the latest updates.

| What is inflation? | CPI versus RPI inflation | UK inflation forecast | CPI release dates |

Hello and welcome. Tomorrow is inflation day.

A lot has happened since we last reported on consumer prices. The Spring Statement, April price hikes, a new tax year, and the small matter of a US trade war and stock market crash.

Hang onto your hats, as more volatility almost certainly lies ahead. Trump doesn’t appear to be done with tariffs, and here in the UK, we are yet to see the full effects of recent tax changes on economic growth.

In the world of inflation, prices are expected to hit 3.75% later this year, but the good news is that a drop in the headline rate is expected tomorrow. This could strengthen the case for an interest rate cut when the Bank of England next meets in May.

Stick with us today for the latest forecasts and analysis, before rejoining us tomorrow for live reporting when the inflation data is published at 7am.

Inflation expected to slow to 2.7%

The Bank of England expects inflation to slow to 2.7% tomorrow, according to forecasts published in its latest quarterly monetary policy report.

The economists at Pantheon Macroeconomics agree. They said a drop in motor fuel prices should contribute to the slowdown, as well as “distortions from last year’s early Easter”, which are expected to reduce services inflation by 10 basis points.

Pantheon expects services inflation to come in at 4.9% in March, down from 5% in February. It expects core inflation to hold steady at 3.5%.

The calm before the storm?

Tomorrow’s slowdown is likely to be short-lived, if it materialises. After slowing to around 2.7% in March, the Bank of England expects inflation to pick up to 3.6% in April. It said price rises could ultimately hit 3.75% in the third quarter, driven by higher energy prices.

“Although global energy prices have fallen back recently, they remain higher than last year and CPI inflation is still projected to rise to around 3¾% in 2025 Q3,” the Bank wrote in a summary statement after the March MPC meeting.

How will Trump’s tariffs impact inflation?

The Bank of England’s inflation forecasts (summarised in our previous post) were published before Donald Trump’s latest round of tariffs. It is too early to know exactly what impact tariffs will have on UK inflation and interest rates, but they could change things.

While tariffs make goods and services more expensive (by adding a tax which is ultimately passed on to consumers), they also tend to slow economic growth. A slowdown in growth can be disinflationary.

When managing the impact of tariffs, the Bank of England will need to weigh growth considerations against inflation considerations. Cutting interest rates would help support economic growth, but could allow prices to rise further.

A lot will depend on the scale of the tariffs that are ultimately imposed and how countries around the world retaliate. For now, Trump has paused most of the harshest measures.

More to follow.

Capital Economics: “The US trade war may prove disinflationary for the UK”

Consultancy Capital Economics points out that a trade war could result in weaker global demand. This “raises the chances that inflation will be lower in the medium term,” said Ruth Gregory, deputy chief UK economist at the consultancy.

Currency dynamics could also play a role. Until recently, Capital Economics thought US tariffs would cause the pound to weaken against the dollar but, so far, it has remained stable. A stable pound should “limit the upward effects” of higher import prices on UK inflation.

On top of this, the dumping of goods originally intended for other economies could push UK prices down.

“With China currently facing much higher tariffs than we had anticipated, products originally intended for the US market may end up in the UK at lower prices than similar products already available,” Gregory said.

If the UK government decides to retaliate against the US with harsh tariffs of its own, that could prove inflationary – but it seems unlikely. Prime minister Keir Starmer has been clear that “a trade war is in nobody’s interest”.

UK labour market is weakening

Let’s turn our attention to the latest labour market data, published by the Office for National Statistics (ONS) today. The report showed some signs that the labour market is continuing to weaken.

On the one hand, regular wage growth and the unemployment rate both held steady in this month’s report, at 5.9% and 4.4% respectively.

On the other hand, job vacancies fell to 781,000, down from 816,000 previously, suggesting businesses are putting a pause on hiring. The number of payrolled employees also decreased by 78,000 in March, based on early estimates.

Going forward, the unemployment rate is likely to rise. Deutsche Bank expects it to pick up to 4.5% in next month’s report.

“Importantly, updated DWP advanced redundancy notifications data has spiked in recent weeks suggesting more job losses in the coming weeks and months,” said Sanjay Raja, chief UK economist at the investment bank.

Evidence of a weaker labour market could open the door to a rate cut from the Bank of England in May.

Rising cost of employment is a “major challenge” for businesses – will it translate into higher prices?

Businesses are being hit with higher costs from every angle. The recent increases to National Insurance and the minimum wage have added to their wage bills considerably, with the British Chambers of Commerce (BCC) calling it a “major challenge”.

Jane Gratton, the BCC’s deputy director of public policy, said it will be “some time” before we fully understand the true impact of these increases on jobs and investment. But some businesses have warned that it could translate into price rises and layoffs.

A survey of 52 leading retailers, conducted by the British Retail Consortium (BRC) earlier this year, suggested as many as two-thirds of businesses could look to raise prices to help offset the cost of the NI increase.

Around half of businesses said they would look to reduce hours and overtime or staff headcount.

How many times will the Bank of England cut interest rates this year?

Most economists expect at least two more rate cuts from the Bank of England before the end of 2025.

• Capital Economics thinks rates will be trimmed by 25 basis points in May, followed by a further 25 basis-point cut in November. This would take the base rate to 4% by the end of the year.
• Financial institution ING is forecasting quarterly cuts. This would mean three more cuts in 2025 (we already had one in February), bringing the base rate to 3.75%.
• Deutsche Bank on the other hand is expecting four, taking the base rate to 3.5%.

The Bank of England has been clear that it will assess things on a meeting-by-meeting basis, taking a “gradual and careful approach”.

The path of UK inflation

The below chart shows the path of UK inflation over the past four years, and includes Bank of England projections for the next few months (March 2025 to June 2025). Projections are illustrated with the dotted line.

As you can see, inflation peaked at 11.1% in October 2022. The rate of price increases is not expected to hit that level again any time soon – at least not unless the economy faces another serious shock event like Covid.

However, prices are expected to creep up at a faster pace over the coming months. The inflation rate is expected to hit 3.6% when April's figures are published next month. By the third quarter of the year, the Bank of England said the headline rate could even hit 3.75%.

Tell us what you think

We want to know what you think will happen in tomorrow's report. Will the headline rate of inflation rise, hold steady, or fall?

That concludes our live coverage for today but we will be back tomorrow, bright and early. Join us when the inflation report drops at 7.00am.

Good morning and welcome to our live blog. In just over an hour, the latest inflation figures will be published. To recap, analysts are expecting a reading of 2.7% today, a slight slowdown compared to February's report (2.8%).

It could be the calm before the storm with inflation likely to face a big jump the following month, potentially coming in at 3.6% in April, based on Bank of England forecasts.

A lower reading today could strengthen the case for an interest rate cut from the Bank of England at its next meeting.

The Bank is having to balance a complex range of considerations currently. Some indicators like wage growth remain high, but growth concerns are ramping up – particularly in light of Donald Trump's tariffs.

Pantheon Macroeconomics says "pay growth needs to be rising just 2-to-3% year-over-year, rather than 5%-plus, to deliver inflation sustainably at 2%". Yesterday's report came in at 5.9%. However, other parts of the labour market seem to be weakening, with job vacancies falling, for example.

Overall, Pantheon thinks the latest labour market report was weak enough to facilitate a rate cut in May. It is expecting three further rate reductions this year, taking the base rate to 3.75% by the end of 2025.

March's inflation report will be published in around five minutes. Stick with us for live reaction and what it means for your finances.

BREAKING: UK inflation slowed to 2.6% in March

The latest data from the Office for National Statistics shows UK inflation slowed to 2.6% in March, down from 2.8% in February. The result was below analysts' expectations of 2.7%.

Just as a reminder: a lower rate of inflation doesn't mean prices are falling overall, just rising at a slower rate.

What drove the inflation drop?

The largest downward contributions to the drop in the CPI rate came from recreation and culture, and motor fuels. The largest upward contribution came from clothing.

Core and services inflation both lower

The rates of core and services inflation both slowed in March too.

Core inflation, which excludes volatile categories like food and energy, came in at 3.4%, down from 3.5% in February. Services inflation came in at 4.7%, down from 5% in February.

Again, these figures are lower than some analysts were expecting. Pantheon Macroeconomics expected core inflation to hold steady at 3.5%, and services inflation to come in at 4.9%.

These figures should strengthen the case for a rate cut from the Bank of England on 8 May.

"A temporary reprieve"

While today's lower-than-expected reading is good news, particularly for those hoping for an interest rate cut in May, households shouldn't get carried away.

Prices are expected to jump when April's data is released next month, potentially hitting 3.6%, based on Bank of England forecasts.

Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales (ICAEW), makes this very point. He thinks inflation could hit 3.5% in April.

"March’s inflation drop is only a temporary reprieve as a hefty increase is nailed on for April, with rising energy bills and surging business costs, including higher National Insurance, likely to lift inflation to around 3.5%," he said.

What does today's inflation reading mean for mortgage rates?

A lower-than-expected inflation reading strengthens the case for an interest rate cut in May, which could be good news for those looking to take out a mortgage or refinance. Mortgage rates typically fall as interest rates come down.

That said, inflation data and interest rate decisions are typically priced into markets in advance based on expectations – and a spike in inflation is expected next month, with price rises potentially hitting 3.75% by the third quarter of the year. Mortgage rates are unlikely to come down too dramatically with this news on the horizon.

"This might be the last good reading for a few months, so let’s enjoy it while we can. It’s likely we have a few bumps in the road ahead of us – especially before it feels like we’re seeing inflation back under control and where it needs to be," said Ben Thompson, deputy chief executive at the Mortgage Advice Bureau.

"Navigating the balance between inflation and low UK economic growth has been made a lot harder by the wholly unpredictable nature of activity over the pond. Unfortunately, it’s likely there will be some sort of impact to UK numbers as a knock-on later this year and beyond, and right now, trying to work out where that all may or may not go is like fumbling through a thick fog blindfolded," he added.

On the one hand, tariffs could push inflation up as the costs associated with the taxes add costs for businesses, which are passed on to consumers. On the other hand, tariffs are expected to slow global economic growth, which could be disinflationary.

In recent weeks, the market has started pricing in more interest rate cuts this year, suggesting investors expect the Bank of England to prioritise growth concerns over inflation. This has fed into swap rates (which underpin mortgage pricing) and brought mortgage rates down.

But Trump has now paused most of the harshest tariffs announced on 2 April. If he sticks to this route, expectations for rate cuts could ease back, moving closer to where they were before.

Whatever happens with interest rates, it is worth shopping around for a new mortgage a few months before your current deal expires to lock in the best market rates as they appear. If a better rate appears in the meantime, you can usually change it right up until the start date.

What does a drop in the inflation rate mean for savers?

Today's inflation news will be less welcome to savers, who "may soon find returns edging lower," according to Paul Went, head of savings at Shawbrook Bank.

Despite this, many of the best savings accounts are still offering rates north of 4.5%. This means those with significant cash balances could quickly exceed their personal savings allowance and fall into the savings tax trap.

Most basic-rate taxpayers are allowed to earn up to £1,000 in savings interest outside of an ISA each year before tax is due. This falls to £500 for higher-rate taxpayers, while the allowance disappears entirely for additional-rate taxpayers.

"With the 2025/26 tax year now underway, savers should take advantage of their full ISA allowance, shielding up to £20,000 from tax," said Went.

"Our analysis of CACI data reveals that more than 6 million savers risk breaching their personal savings allowance, making it more important than ever to review savings strategies."

In a falling-rate environment, fixed-rate savings accounts and ISAs could be worth a look. These allow you to lock in a higher rate for longer, if you have a pot of cash you are willing to put away for a year or so.

Inflation: big drops to pizza, quiches and musical instruments

The main items which drove the rate of inflation down this month were weaker transport price rises, accommodation prices, and recreational and personal services.

However, digging deeper into the data, Deutsche Bank points out that there were also "big drops in things like communication equipment, sea fares, leisure goods (games), smart watches, pizza and quiches, as well as musical instruments".

Where to next? Deutsche Bank thinks inflation will push above 3.25% in April. The Bank of England has forecast 3.6%.

"Inflation will take a big step up in April, pushing above 3.25% as energy and water bills lead inflation higher," said Sanjay Raja, chief UK economist at the investment bank.

"The good news? We still see inflation running below the MPC’s forecast through Q2-25 – giving the MPC enough runway to cut rates through the year.

"The peak in CPI will likely sit lower than we thought – closer to 3.5% as opposed to 3.75%. And we expect inflation to return to target by the middle of next year."

Deutsche Bank thinks the MPC now has enough room to continue to dial down its restrictive policy, both on the back of weaker labour market data yesterday and softer inflation data today.

"In fact, we think the chances of a dovish pivot have increased heading into the May forecast round," Raja said. This refers to the Bank's quarterly monetary policy report, which includes forecasts for the months ahead. The last report was published in February.

Annual house price inflation 5.4% in February

The price of the average UK property rose by 5.4% on an annual basis in February, up from a revised figure of 4.8% in January, according to official figures from HM Land Registry. Prices were unchanged on a monthly basis. The average property now costs £268,000.

House price inflation data is released each month on the same day as the ONS inflation report, but at the later time of 9.30am.

Will stamp duty changes dampen the housing market?

The increase in the annual rate of house price inflation from 4.8% in January to 5.4% in February paints a resilient picture of the housing market.

Emma Cox, managing director of real estate at Shawbrook, attributes it to "the emergence from the usual winter slowdown" and "a flurry of activity as buyers looked to complete purchases ahead of the removal of stamp duty relief".

We could see a slowdown going forward, though.

On 1 April, the stamp duty threshold for first-time buyers dropped from £425,000 to £300,000. Meanwhile, home movers saw the tax-free threshold drop from £250,000 to £125,000, pushing up purchasing costs.

While the data from HM Land Registry still looks quite strong, separate data from two major lenders paints a weaker picture of slowing growth as the stamp duty window narrowed.

Figures from Halifax suggest house prices rose by 2.8% on an annual basis in March, marking no change compared to February. On a monthly basis, prices fell by 0.5%. Nationwide also reported no change in the annual figure between February and March (3.8%). The monthly figure was flat at 0%.

Although stamp duty thresholds didn't drop until the end of March, those who weren't already a good way through the conveyancing process early on in the month probably failed to complete in time.

Back to inflation... households grapple with higher bills

Although the rate of inflation slowed in March, households are unlikely to be breathing a sigh of relief with a string of bill hikes having taken effect at the start of April. These are likely to contribute to a spike in inflation in next month's report, when the Bank of England thinks the headline rate could hit 3.6%.

The Resolution Foundation, an independent think-tank, commented today: "Bill increases are particularly concerning to low-to-middle income households, for whom energy spending took up nearly twice as much of their total consumption in 2022-23 as it did for high-income households (11% compared to 6%).

"These persistent pressures on core costs are hitting household budgets that are already stretched, with food insecurity recently reaching rates of 11% (in 2023-24)."

Going forward, a lot could depend on Donald Trump's trade policies.

"Global trade uncertainty could drive down our prices, with oil already down more than 10% since the start of April – but a global trade war would create renewed inflation, increasing pressure on British families already struggling with the cost of living," added James Smith, the think-tank's research director.

So far, economists are divided on whether tariffs will push inflation higher or bring it down as the trade war drags on economic growth. Households are unlikely to win in either situation, as a weaker economy could result in slower wage growth and even redundancies.

UK continues to face "stickier inflationary pressures"

Despite a larger-than-expected drop in March, the UK continues to face "stickier inflationary pressures" than other advanced economies, according to Nathaniel Casey, investment strategist at wealth manager Evelyn Partners.

"This has been reflected in the bond market, with gilt yields remaining significantly higher than their European counterparts such as German bunds, even as both markets face a similarly weak growth profile," he said.

10-year gilt yields are currently just shy of 4.6%, while 10-year bund yields are closer to 2.5%.

Thank you for following our live coverage of inflation today. The next CPI figures will be released on 21 May. We will be live blogging again then. In the meantime, look out for our live coverage of the Bank of England's next interest rate meeting on 8 May.

Investors have suffered painful losses in recent days after US president Donald Trump’s “Liberation Day” tariffs prompted a major market sell-off. Investors are concerned that tariffs will throw cold water on company earnings and broader economic growth.

The impact on inflation, particularly in the US, could also be significant.

According to economists at Goldman Sachs, each time the average tariff rate goes up by one percentage point, the rate of core US inflation goes up by around 0.1 percentage points.

Ratings company Fitch estimates that the latest measures will raise the overall US effective tariff rate to around 25% – the highest rate in more than 115 years. Last year, the effective tariff rate in the US was around 2.3%.

Separate analysis from consultancy Capital Economics suggests Trump’s tariffs will push the effective tariff rate up by around 25 percentage points. As imports account for roughly 10% of consumption in the US, this could add roughly 2.5 percentage points to the CPI price level, the consultancy said.

Capital Economics expects US CPI to be “well north of 4%” by the end of this year, up from 2.8% in February. This would be a significant rise, but still lower than than the post-pandemic peak of 9.1% in June 2022.

Tariffs are a tax on foreign imports paid by businesses when they bring goods into the country. Companies typically pass these costs on to consumers by putting their prices up, which is why tariffs generally prove inflationary.

What tariffs has Trump imposed?

In recent days, Donald Trump has imposed sweeping “Liberation Day” tariffs of up to 50% on sixty countries, including a 34% tariff on China, 24% on Japan and 20% on the European Union. A baseline tariff of 10% is also being imposed on almost all foreign imports into the US.

This is on top of existing measures announced in February and March, including 25% steel and aluminium tariffs on all countries, a 25% duty on all cars made outside of the US, a 20% levy on China, and more.

As introduced previously, the effective tariff rate when all imports are considered holistically is now around 25%.

This will make any imports more expensive and push up the cost of any domestically-manufactured goods that include foreign parts. The dollar has also weakened since Trump’s latest tariff announcement on 2 April, which could exacerbate the inflationary effect in the US.

Will prices rise in the UK?

Given the interconnected nature of global economies, some form of contagion effect is possible, but it is currently unclear what this might look like.

For now, the UK appears to have got off relatively lightly compared to countries in Asia and the European Union. It has only been slapped with the metal tariffs, the car tariffs, and the baseline 10% universal tariff.

“It seems certain that the US will see marked price rises, but how far these tariffs will raise prices in the UK and Europe depends in part on whether there is any retaliation,” said Jason Hollands, managing director at wealth management firm Evelyn Partners.

“In a similar but less significant way to what occurred during the pandemic, it is likely that UK firms will see less choice and higher prices in goods that they source from overseas,” he suggests.

The picture is complex, though, particularly when you consider the fact that tariffs are also likely to dampen economic growth. In turn, this could prove deflationary. James Smith, developed markets economist at European bank ING, delves into this counterargument.

“The fact that the government hasn’t retaliated to the US tariff announcement thus far means the impact should be minimal,” he said. “If anything, it could prove deflationary further down the line as economic growth cools and the threat of dumping from other big global producers rises.”

How will central banks respond?

When the Bank of England met to set interest rates in March, it discussed the potential fallout of Trump’s looming tariff announcement, and indicated that it would take a wait-and-see approach.

While it acknowledged that tariffs could skew growth risks to the downside, it said the overall effect on UK inflation was “less clear”, and would “depend on where other countries’ trade policies settled and how these transmitted through different economic channels, including exchange rates”.

Since Trump’s tariffs were announced on 2 April, markets have adjusted to price in a faster pace of interest rate cuts, but this is largely being driven by weaker growth expectations.

There is also a degree of uncertainty when it comes to the US Federal Reserve.

“Whilst the negative impact on growth due to trade barriers seems clear, the impact on inflation and therefore the response of central banks is much less so,” said Andrew Chorlton, chief investment officer for fixed income at M&G, the investment management firm.

“This is probably best exemplified by the chair of the Fed's recent comments in early April, stating that he felt the impact on inflation of any increase in tariffs would be transitory in nature, i.e. a one-off jump in prices.

“Just a few days later on Friday, he acknowledged that the impact of tariffs on both inflation and employment is unclear and that he is taking a wait-and-see approach.”

Summary

• UK Consumer Prices Index (CPI) increased 2.8% in the year to February;
• Economists expected the rate of inflation to remain at around 3%;
• Last month, data revealed a surprise jump in inflation to 3% in the year to January;
• The IEA has released a paper arguing that inflation should no longer form the cornerstone of central bank policy;
• The Bank of England forecasts that inflation could reach 3.7% by the third quarter of 2025;
• The release coincides with chancellor Rachel Reeves’ Spring Statement.

The team at MoneyWeek is reporting live ahead of Wednesday’s announcement, starting with preview analysis.

Scroll for the latest updates.

| ONS reshuffles inflation basket | CPI vs RPI | CPI release dates |

Good afternoon, and welcome to our live blog covering Wednesday’s February Consumer Prices Index (CPI) release.

Last month’s release revealed a surprise jump in inflation to 3% in the year to January. Analysts had forecast the headline figure to read 2.8% ahead of the release.

Follow us today and tomorrow as we bring you the latest forecasts, analysis and breaking news surrounding February inflation data.

When is inflation data released?

Inflation data for February will be released at 7am tomorrow, Wednesday 26 March.

See our article on upcoming CPI release dates for a full list of the upcoming releases.

What do experts expect from the inflation reading?

Rob Wood, chief UK economist at Pantheon Macroeconomics, expects the headline CPI inflation rate to hold at 3.0%.

This is slightly higher than the 2.8% that the Bank of England’s Monetary Policy Committee (MPC) forecasts for the end of the first quarter 2025.

According to Wood, the headline figure is likely to be lifted by stronger food and core goods inflation.

“February should be the ‘calm before the storm’ of annual price resets, as government-set price hikes and tax rises drive up headline CPI inflation to 3.5% in April,” writes Wood.

Longer-term UK inflation outlook

The MPC expects inflation to rise to 3.7% during the first half of this year, driven by increasing energy prices and some regulated prices such as water bills.

Over the long term, it expects inflation to fall back to around its 2% target. However, the MPC notes that there is a lot of uncertainty involved here; the unpredictable tariff regime, or a resumption of the Middle East conflict, could provide upside risk to this outlook.

Pantheon Macroeconomics expects inflation to peak in September at 3.7%, with a dip to 2.8% in March preceding an increase to 3.5% in April.

“Utility price hikes, annual price resets, and in particular water bill and vehicle excise duty increases drive that April inflation jump,” writes Robert Wood, chief UK economist at Pantheon Macroeconomics.

What do households expect to happen to UK inflation in the long term?

Individual consumers have higher expectations of longer term inflation than the MPC or Pantheon Macroeconomics, though.

Last week’s Citi/YouGov survey showed households’ inflation expectations for the coming year hit their highest level for more than a year during February, increasing to 3.9% from 3.5% in January.

“Inflation expectations are on the rise,” writes Sanjay Raja, senior economist at Deutsche Bank. “[Last week’s] Citi/YouGov index highlighted a further shift higher in both near-term and long-term inflation expectations,w ith both measures rising to 3.9%.

“On both sources, inflation expectations now sit well above their long-run averages.”

Deutsche Bank: inflation could rise in February

Unlike Pantheon Macroeconomics, which expects inflation to remain the same month-by-month in the next reading, Deutsche Bank thinks that inflation could edge upwards this month.

“After an upside surprise to CPI to start the year, we expect headline CPI to inch higher in February,” says Sanjay Raja, senior economist at Deutsche Bank. “We see CPI reaching 3.14% year-over-year.”

Raja forecasts services inflation remaining broadly unchanged at 4.9%, and RPI to fall slightly to 3.52%.

What is measured in the inflation basket?

When calculating inflation, the ONS looks at how the price of a basket of goods that is, theoretically, representative of what the average consumer buys and uses in day-to-day life has changed.

The basket is subject to periodic reviews, the latest of which took place last week.

The reshuffle saw VR headsets added to the basket, as well as exercise mats and pre-cooked pulled pork. Fresh turkey and newspaper adverts are among the items removed from the basket.

For the full details, read our explainer: ONS reshuffles inflation basket.

The question is – if you were representing the average consumer, what would the most-bought item in the basket be? For me, it’s biscuits, but let us know your response on the poll below.

IEA: inflation shouldn’t be Bank of England’s focus

The Bank of England held interest rates at 4.5% last week, with January’s spike in inflation to 3% influencing its decision.

The Bank has a mandate to target a 2% rate of inflation. This is viewed, in general, as a healthy level of inflation for an economy to run at, and most central banks have a similar mandate.

Yesterday, though, the think tank Institute of Economic Affairs (IEA) published a research paper entitled ‘Rethinking monetary policy’ in which it argued that nominal GDP growth, not inflation, should be the core metric that the Bank targets.

The paper argues that inflation targeting as a guide of central bank policy has been undermined by past failures to anticipate inflationary shocks.

“Too often, the BoE has underestimated the influence of fiscal policy and its own balance sheet expansions on inflation trends, contributing to monetary policy decisions that have added to the erosion of real incomes and exacerbated the cost-of-living crisis,” economist Damian Pudner wrote for the IEA.

Nominal GDP (NGDP) targeting, by contrast, would see central banks targeting either a certain level of GDP growth, or a particular change in GDP growth rates. In the case of a supply shock – where output and inflation move against each other – NGDP would let policymakers “allow the price level to adjust to changes in output without immediately tightening policy.”

This is a relatively controversial idea, but it has some pedigree: Sajid Javid recommended a similar shift in Bank policy in 2020, soon after the end of his tenure as chancellor of the exchequer.

That's everything from us for this evening. Join us tomorrow morning, when we'll bring you the live inflation reading when it lands at 7am, as well as analysis and reaction throughout the day.

Coming up: ONS’ UK inflation announcement

Good morning, and welcome back to our live blog covering the latest UK inflation read.

There’s just under an hour to go until the announcement. As a reminder, the consensus view – held by economists polled by Bloomberg as well as consultancy Pantheon Macroeconomics – is that the Consumer Prices Index (CPI) will have risen 3% year-over-year in February, the same rate of inflation as in the year to January.

We’ll bring you live coverage of the release as it happens – and keep following the blog today for reaction and analysis.

BREAKING: CPI ROSE 2.8% IN YEAR TO FEBRUARY

CPI inflation slightly below economists’ forecasts

The general consensus among economists had been for another 3% year-over-year rise in CPI inflation in February, so the slight drop from the previous month is a pleasant surprise.

Month-over-month, CPI rose by 0.4% in February 2025, compared to 0.6% in the same period last year.

Clothing was one of the biggest downward influences on prices, with housing and household services having a large downward impact on CPIH (more on that to follow).

CPIH rose 3.7% in year to February

The Consumer Prices Index including owner occupiers' housing costs (CPIH), which is perhaps the fullest picture available of inflation in the UK economy, rose 3.7% in the year to February – down from 3.9% in the year to January.

As it includes aspects of the cost of owning a home, the CPIH has some similarities to the Retail Prices Index (RPI). CPIH isn’t internationally comparable, so isn’t generally used as the headline inflation figure. However, the fall will be welcome news to homeowners worried about spiralling costs.

For more insight on the differences between the measures of inflation data, see our explainer on CPI vs RPI and other inflation metrics.

Core CPI and CPIH figures

Some of the prices tracked by the CPI and CPIH are subject to large short-term fluctuations. As such, the ONS also publishes “core” versions of these figures which strip out energy, food, alcohol and tobacco – the most volatile goods in the basket.

Core CPI rose 3.5% in the year to February, down from 3.7% in the year to January. Core CPIH rose 4.4%, down from 4.6% the previous month.

A temporary reprieve for consumers?

The fall in inflation in the year to February is welcome news and will have been felt by consumers. However, Scott Gardner, investment strategist at wealth manager Nutmeg, warns that the latest data represents just “a momentary reprieve for UK consumers.

“Some might see this as the calm before the storm after several forecasts have suggested that inflation could move closer to 4% over the course of 2025,” Gardner adds.

He highlights an upward trend in manufacturing PMI prices, as well as flat services inflation. “Likewise, weekly food shops were impacted by a further increase in checkout prices; meanwhile motorists saw a year-on year fall in the cost of petrol.”

He also warns of a risk of further inflation once the upcoming changes to National Insurance for businesses take effect.

Clothing price drops fuel drop in CPIH inflation

The figure that stands out most starkly in the data is the year-over-year fall in clothing and footwear prices.

These increased 1.8% in the year to January, but fell 0.6% in the year to February.

Other categories – such as furniture and household goods – recorded a slowdown in price increases (in this case, from 0.5% in the year to January compared to 0.2% in the year to February), which will have also contributed towards the slowdown in inflation.

^{Source: Consumer price inflation from the Office for National Statistics}

Services inflation remains sticky

The dampener, as far as the welcome fall in inflation is concerned, is CPI services inflation, which remained unchanged from the previous month at 5.0%.

This could worsen from April, as changes to National Insurance for businesses kick in.

“Businesses up and down the country have already warned of plans to pass on rising employment costs to their customers to offset the hit from Chancellor Rachel Reeves’ increases in employment taxes along with the minimum wage – a trend likely to prove inflationary,” says Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners.

“The upcoming rise in employer NI contributions could put a spanner in the works, given how much staff costs weigh on UK services businesses,” says Dan Lane, lead analyst at Robinhood. “While it’s currently being propped up by wage growth, the BoE really needs to see services CPI recede heavily if it’s going to feel more confident reducing rates in the back half of the year.”

Deutsche Bank: longer term picture remains unchanged

Sanjary Raja, chief UK economist at Deutsche Bank Research, thinks that while the latest inflation read will ease the pressure going into Rachel Reeves’ Spring Statement later today, the longer term outlook is still a cause for concern.

“Make no mistake, inflation remains on a one-way journey: up,” says Raja. “We see headline CPI rising to just under 4% year-over-year later this year.

“The good news is that today’s data should provide the BoE a path to continue with its gradual dial down of restrictive policy,” he added. “We continue to think a May rate cut is more likely than not. And we expect Bank Rate to fall to 3.25% next year as headline pressures recede and wage settlements fall back to a more target-consistent level of 3%.”

What does the dip in inflation mean for your savings?

Inflation is a killer for savers, eating into and eroding the value of interest over time.

It’s “essential” to ensure that savings at least keep pace with, and ideally beat, inflation, says Paul Went, managing director of savings at Shawbrook Bank.

“Inflation slowing gives savers more good news following the Bank of England’s decision to hold interest rates at its last meeting,” says Went. “However, it does still pose some challenges for savers. Especially those who haven’t switched accounts recently or reviewed their interest rate.

“There are nearly 800,000 fixed accounts due to mature in April and common misconceptions could be stopping savers from boosting their nest eggs. Indeed, many savers could unknowingly be missing out on higher returns due to common misconceptions about where their money is safest.”

See our explainer on inflation-beating savings accounts for more information.

Recap: UK inflation slows in year to February

Here’s a recap on the headline inflation figures that were announced this morning:

• CPI inflation reached 2.8%, down from 3.0% in the year to January;
• CPIH inflation reached 3.7%, down from 3.9%;
• Core CPI inflation reached 3.5%, down from 3.7%;
• Core CPIH inflation reached 4.4%, down from 4.6%.

What does the inflation dip mean for interest rates?

Inflation puts up the price of things we buy, but it also has less direct impacts on our finances.

It is the principal metric that the Bank of England (BoE) looks at when determining interest rates. It typically increases interest rates if inflation is running high (above its 2% target, though the present situation is somewhat unusual in that the Bank is gradually cutting rates despite inflation running above this level).

“The BoE has its hands full as it tries to control inflation while reducing rates to minimise economic harm. It also has a lot of plates spinning when it comes to monitoring the various influences on prices,” says Rob Morgan, chief investment analyst at Charles Stanley.

While the impact of the upcoming changes as a result of the Budget, particularly business NICs, is hard to predict, weakness in the economy alongside this latest inflation dip could persuade the Bank to continue cutting at its next meeting.

“A further 0.25% cut at the BoE’s meeting in May is a possibility if inflation trends a bit lower and jobs data comes in softer by then, but that is far from a given,” says Morgan.

What’s happening with house price inflation?

The ONS has also released information on house price inflation today.

Average monthly rental prices increased by 8.1% in the 12 months to February, down from 8.7% in January. Average prices increased by 4.9% in the 12 months to January, up from 4.6% in the 12 months to December 2024.

“Rents are still rising faster than earnings and we expect rental inflation to slow further over 2025,” says Richard Donnell, executive director at Zoopla.

“House prices are rising on the back of increased activity over 2024 with 10 per cent more sales and lower mortgage rates boosting demand, along with a rush to beat the stamp duty holiday,” he adds. “Our latest Zoopla data shows a significant increase in the supply of homes coming onto the market, rising at a faster pace than sales. Together with weaker first-time buyer demand and higher buying costs for most purchases, after April we will see price growth slowing over 2025.”

Thanks for following the live blog today. We took a bit of a break to cover Rachel Reeves’ Spring Statement - head over there for all of the latest if you haven't already.

We'll be back covering inflation live at the next release, scheduled for 16 April. But in the meantime, that's all from us on CPI.

Summary

• UK inflation, as measured by the Consumer Prices Index (CPI), rose to 3% in January, coming in higher than analysts' forecast of 2.8%.
• January's inflation figure is the highest since March 2024.
• It follows a surprise drop in the CPI rate in December, when the headline figure fell from 2.6% to 2.5%.
• The main categories which pushed CPI higher in January were transport (notably airfares) and food and non-alcoholic beverages.
• Meanwhile, the largest downward contribution came from housing and household services.
• Educational costs also rose by 7.5% on an annual basis in January, up from 5% in December, driven by the government's new policy of imposing VAT on private school fees.
• Going forward, inflation is expected to rise further over the course of the year, potentially hitting 3.7% in the third quarter, according to the latest forecast from the Bank of England. Higher global energy prices are expected to be the main driver.

The team at MoneyWeek is reporting live. Scroll for the latest news and analysis.

| What is inflation? | Inflation forecast | CPI release dates | Interest rate predictions |

One day to go until January’s inflation report

Good Tuesday afternoon, and welcome to MoneyWeek’s inflation live blog. The sun is shining in London today and it feels like spring is on the way. The outlook for inflation is less bright, though.

The headline CPI figure is expected to come in at 2.8% tomorrow, up from 2.5% in December. A bounce in airfares and the introduction of VAT on private school fees are two factors that could contribute to the rise.

It comes after the Bank of England recently warned that inflation could hit 3.7% in the third quarter of this year, primarily driven by a rise in global energy prices. The Bank is pleased with the progress we are seeing in domestic parts of the economy, though, and expects this inflation bump to be relatively short-lived.

Inflation forecast: naturally, not everyone agrees

While most analysts seem to be forecasting a headline figure of 2.8%, not everyone agrees. In its UK economic outlook published last week, the National Institute of Economic and Social Research (NIESR) said it expects inflation to rise to 3.2% in January, before slowly falling back to target. It expects inflation to average out at 2.4% in 2025 as a whole.

Meanwhile, the economists at investment bank Deutsche Bank are forecasting a headline figure of 2.9%. Senior economist Sanjay Raja writes: “Our models point to headline CPI pushing up to 2.9% year-on-year. We see core CPI pushing higher to 3.8%. Services CPI, we think, will move up to 5.25%. And the Retail Prices Index (RPI), we estimate, will push higher to 3.7%.”

Wage growth accelerates – what does it mean for inflation?

The ONS published the UK’s latest labour market report this morning, which showed wage growth accelerated in the period between October and December. Regular earnings grew by 5.9% on an annual basis during the period, up from 5.6% in the previous three-month period. Meanwhile, total wage growth (including bonuses) came in at 6%, up from 5.5% previously. Wages are a big driver of inflation, so this could spell bad news for future price increases.

That said, businesses have warned that the labour market could take a hit later this year when new tax policies come into effect in April. The government is raising employers’ National Insurance contributions, and businesses have warned they may need to reduce working hours or headcount to offset the effects. Wage growth is expected to slow too, as employers look to mitigate the effects of an increasingly expensive wage bill by limiting the size of any pay rises.

Commenting on the outlook for the labour market, Danni Hewson, head of financial analysis at investment platform AJ Bell, said: “It feels like we’re enjoying the calm before the storm. Big black clouds are swirling on the horizon if you factor in all the surveys and data from recruitment agencies which suggests that businesses are cutting back on their hiring intentions for the year and will consider job cuts and smaller wage hikes after April.”

What are the private school VAT changes and why do they matter for inflation?

One of the government’s election promises was to end the VAT exemption on private school fees, using the money to recruit more teachers into the state sector. This policy came into effect at the start of January.

Not all schools raised their fees by the full 20%. However, a survey of 964 schools conducted by The Telegraph last year showed that around half were planning to increase their fees by 15% or more. A fifth, including the famous Eton College, said they would be increasing fees by the full amount. As a result, one of the categories that is expected to rise in January’s inflation report is educational costs.

Deutsche Bank expects the VAT policy to push primary and secondary school fees up by 12.5%, which it says would lift the education basket by 4.1% month-on-month.

Kantar data points to a slowdown in grocery inflation

Data published by market research firm Kantar suggests grocery inflation slowed to 3.3% in January, down from 3.7% in December. It is worth remembering that a positive inflation figure means prices are still rising overall, just at a slower rate than they once were.

Responding to the slowdown in the rate of price increases, Fraser McKevitt, head of retail and consumer insight at Kantar, said: “With household budgets typically stretched at this time of year, retailers played their part in easing the pressure on purse strings. Supermarkets were dishing out the discounts this New Year, and consumers responded. Spending on promotions rose year-on-year by £274 million, accounting for 27.2% of sales – the highest level in January since 2021.

“People also turned to non-branded products to help keep costs down, with own label products as a proportion of sales hitting a record high of 52.3% in January.”

Services inflation could rise tomorrow before falling back in the Spring

Services inflation slowed from 5% to 4.4% in last month’s CPI report, partly driven by a smaller rise in airfares than is typically seen in the final month of the year.

The metric is expected to bounce back in January’s report, potentially even hitting 5.25%, according to Deutsche Bank. However, we should see further disinflation in the services sector in the spring.

Analysis from European bank ING points out that several items in the services basket come with index-linked contracts. This includes things like broadband and phone deals which come up for renewal once a year – typically in April.

These are often linked to past rates of CPI or RPI inflation, which was more muted in 2024 than 2023. With this in mind, the economists at ING expect the annual price hikes to be “less aggressive” in April this year than they were last year.

Why is services inflation so important?

Services CPI is closely-watched by the Bank of England, as it is a good gauge of how embedded inflationary pressures are in the domestic economy. The services sector accounts for around 80% of the UK’s economic output. Until recently, services CPI has been persistently high.

The longer-term inflation outlook

Higher global energy prices are expected to push inflation up later this year. For example, the Ofgem energy price cap is expected to rise by around 5% in April, according to forecasts from consultancy Cornwall Insights.

Other factors could have an impact on prices too, including the rise in employers’ National Insurance contributions from April.

In a recent survey of 52 leading retailers (conducted by the British Retail Consortium), 67% said they were planning to hike their prices this year to offset the effect of higher staffing costs.

Further afield, US president Donald Trump has already started imposing tariffs on imported products and there are fears this could add to global inflationary pressures, if other countries respond and it turns into a full-blown trade war.

Looking ahead, the Bank of England expects inflation to hit 3.7% in the third quarter of this year. Consultancy Capital Economics thinks this is an overshoot, though.

“Our forecast is much lower than the Bank’s,” said Ruth Gregory, the consultancy’s deputy chief UK economist. “We think the loosening in the labour market will feed through to a faster fall in wage growth, causing services CPI inflation to fall faster too.”

There is currently a 0.9 percentage point difference between the forecasts from the Bank of England and Capital Economics.

A look across the pond at US inflation

January’s inflation report has already been published in the US, and it came in higher than expected at 3% (analysts had been forecasting 2.9%). The rate was the highest level for six months, partly driven by higher energy prices.

Going forward, “Trump’s policies of tariffs, tax cuts, deregulation and deportation are all expected to be inflationary to varying extents,” adds Lindsay James, investment strategist at wealth management firm Quilter.

Against this backdrop, officials at the US Federal Reserve have indicated that they are in no hurry to lower US interest rates further. Polling from news agency Reuters indicates the Fed will probably cut rates twice this year, however the range of responses was wide, with no majority view among economists.

Back to the UK: how many interest rate cuts in 2025?

Tomorrow’s inflation report could give us a better sense of how soon the Bank of England will deliver its next interest rate cut. The Monetary Policy Committee (MPC) cut rates at its first meeting of the year in February, bringing the base rate from 4.75% to 4.5%.

Despite the Bank warning that inflation could pick up to 3.7% later this year, two members of the MPC actually voted for a larger rate cut of 50 basis points. The overall message from the Bank, however, was that a “gradual and careful” approach to cutting rates remains appropriate.

Most economists are currently forecasting one rate cut per quarter over the course of 2025, bringing the base rate to around 4% by the end of the year.

Although higher global energy prices are likely to push the headline CPI figure up over the coming months, the Bank is largely pleased with the progress that has been made with disinflation in the domestic economy.

Join us at 7.00am tomorrow

Thank you for joining us for our preview analysis today. We will be back in the same place tomorrow, reporting live as the CPI report is published at 7.00am. See you then.

Welcome back

Welcome back to MoneyWeek’s inflation live blog. There’s less than half an hour to go until January’s CPI report is published. Stick with us as we report on the latest news and what it means for your investments and personal finances.

A quick recap

Let’s have a quick recap before January’s report is published in a few minutes’ time:

• UK inflation is expected to come in at 2.8% in January, up from 2.5% in December.
• This is above the Bank of England’s 2% target.
• Inflation experienced a surprise drop in December, but has been inching up overall after hitting a low of 1.7% in September last year.
• We have still made significant progress since the double-digit inflation seen a few years ago, though. Inflation peaked at 11.1% in October 2022.
• Inflation figures for January have already been published in the US and the Euro area, rising to 3% and 2.5% respectively (up from 2.9% and 2.4%).

BREAKING

The annual rate of inflation rose to 3% in January, up from 2.5% in December, according to the latest CPI report from the ONS.

January CPI: higher than expected

An inflation rate of 3% is higher than most analysts were expecting. The majority had forecast a rate of 2.8%. Analysts at Deutsche Bank went slightly higher at 2.9%, while the NIESR indicated inflation could go as high as 3.2% in January.

What drove the change in inflation in January?

The main categories which pushed CPI higher in January were transport and food and non-alcoholic beverages, according to the ONS. Meanwhile, the largest downward contribution came from housing and household services.

Core and services inflation are both up

Core and services inflation both also rose in January to 3.7% and 5% respectively, up from 3.2% and 4.4%.

Core inflation strips out volatile categories like food and energy, so can be a better gauge of the longer-term inflation trend. Meanwhile, services inflation is an important metric for the Bank of England as the services sector makes up around 80% of the UK economy.

Rebound in airfares pushed transport costs up

As anticipated, a rebound in airfares pushed transport costs up in January, partly contributing to the higher headline rate of inflation. Although airfares fell by 2% on an annual basis compared to the same period a year ago, this was down from a fall of 26% in December.

“Airfares tend to rise into December and fall into January,” the ONS explains. “However, in December 2024 and January 2025, this pattern was less pronounced than in previous years.”

Overall, transport costs rose by 1.7% in the year to January 2025, compared with a fall of 0.6% in the year to December 2024. Airfares were the main factor driving the higher figure, along with motor fuels. This was partially offset by a downward effect from second-hand cars.

Surge in educational costs

There was a large increase in educational costs in January, with the annual inflation rate for the category rising to 7.5%, up from 5% last month.

“The only item that changed price in the education division was private school fees, where prices rose by 12.7% on the month,” the ONS explains. This was compared to no change in the cost of this service a year ago.

The increase can be attributed to the new VAT policy which came into effect at the start of January. Private school fees used to be exempt from the tax, but are now subject to VAT at the standard rate of 20%.

Labour market “more of a problem” than inflation

The Bank of England will be analysing the latest CPI report closely. However, Patrick O’Donnell, senior investment strategist at asset management firm Omnis Investments, says yesterday’s labour market report is “more of a problem for the MPC than the inflation data today”.

The report showed that wages grew at an annual rate of 5.9% between October and December, up from 5.6% in the previous period. Accelerating wage growth is typically bad news for inflation – although businesses have warned that the labour market could weaken over the coming months thanks to tax changes announced in the Autumn Budget.

Commenting on the two reports together, O’Donnell says that “neither helps those looking for a March cut from the Bank of England”.

A balancing act for the Bank of England

The Bank of England has a dual mandate – to control inflation and support growth. This is becoming increasingly difficult.

Having slowed from its peak, inflation is picking up again. Meanwhile, the UK growth forecast for 2025 has recently been slashed in half from 1.5% to 0.75%. There are whispers of stagflation from economic commentators, however governor of the Bank of England Andrew Bailey recently rejected this term.

Commenting on the latest inflation figures, Paul Noble, chief executive of UK-based digital bank Chetwood Bank, said: “While factors driving the uptick – VAT changes and seasonal price shifts – were expected, these offer little comfort as concerns grow over the economy’s fragility. The Bank of England now faces a difficult balancing act.

“Having recently cut interest rates, policymakers may now be forced to reassess their approach. If inflation remains stubborn, further cuts could be delayed, prolonging financial strain for borrowers and businesses. However, keeping rates higher for too long risks deepening economic stagnation in stark contrast to the stable growth many are seeking.”

What does rising inflation mean for your personal finances?

Let’s turn our eye to what it all means for your personal finances. As well as pushing up the cost of your weekly shop (food and drink costs rose by 3.3% over the past year), inflation has significant implications for your savings, housing costs and investments. We will be delving into each over the next few posts.

Wake-up call for savers: inflation is now higher than the average easy-access savings rate

Savers should treat today’s inflation report as a wake-up call. The rate of inflation (3%) is now higher than the average interest rate on an easy-access savings account. This is currently 2.86%, according to financial information company Moneyfacts.

Savers can find a rate far better than this by shopping around. The highest-paying accounts currently offer up to 4.75%. At the very least, your account should be beating inflation, otherwise you are losing money in real terms.

Those who want to lock in higher interest rates for longer could consider a one or two-year fixed-rate account. Just make sure you are willing to lock the money away for the full period – and remember that any emergency funds should be kept in an easy-access account.

As the end of the tax year approaches, now is also a good time to use up any remaining ISA allowance, if you can. See our piece on cash ISAs – and why now could be your last change to grab 5% tax-free savings.

Mortgage rates: bad news for borrowers

The latest inflation report could spell bad news for prospective homeowners or those looking to refinance. It is possible that mortgage rates will inch up as markets assess what the higher inflation reading means for the interest rate outlook.

David Hollingworth, associate director at broker L&C Mortgages said: “Just as last month’s data brought a bit of cheer to the new year for borrowers, it looks like today’s figures could cut any celebration short… We’ll see how the swap markets react, but it would be little surprise if we see them edge a little higher again.

“The base rate cut [earlier this month] and the improved market outlook for rates had helped to fire new, lower fixed-rate mortgage launches. That has even seen the odd deal dipping back below 4%, albeit with big fees.

“Today’s data could put some serious drag on any further momentum building for fixed-rate cuts. With margins so tight for lenders, it could at best see fixed rates holding or at worst apply some upward pressure.”

House prices and private rents – latest data will be published at 9.30am

The latest official data on house prices and private rents will be released at 9.30am, so we will be able to share further analysis on inflation in these categories later this morning.

The upcoming house price report from HM Land Registry will cover the 12 months to December 2024. Meanwhile, the private rents data will cover the 12 months to January 2025.

When it comes to house prices, the picture so far in 2024 is one of recovery, after house prices fell in 2023. Last month's report showed that the average house price was £290,000 in November 2024, which is £10,000 higher than a year ago.

Meanwhile, private rents have continued to soar to record highs. In the 12 months to December 2024, average rents increased to £1,369 in England, £777 in Wales and £991 in Scotland. Despite this, the rate of inflation slowed slightly in December’s report, coming in at 9% across UK private rents as a whole (down from 9.1% in the 12 months to November).

We will share the details of today’s report once it has been published.

Savers may want to consider investing a portion of their funds

Cash returns are eroded when inflation is high or rising, which can make investing more important than ever. Although inflation is a headwind to stock markets too, their higher return potential could mean you have a better chance of beating inflation over the long run.

It is worth remembering that stock markets are volatile, and can go down as well as up. However, a sensible and diversified portfolio of stocks and shares will almost always beat cash over the long run.

One idea could be to consider investing a portion of your savings in a tracker fund, which mirrors the performance of an index like the MSCI World, the S&P 500 or the FTSE 100. Just ensure you have a long enough time horizon to ride out any short-term volatility – a minimum of five years is typically recommended.

Of course, you should always keep a healthy amount of cash in an easy-access savings account too – both for emergencies and nearer-term savings goals (such as purchasing a house).

House prices and private rents

The latest house price and private rental data has now been published:

• Average UK house prices increased by 4.6% in the 12 months to December 2024, up from 3.9% in November.
• Average UK private rents increased by 8.7% in the 12 months to January 2025, down from 9.0% in December.

How much does the average house now cost?

After the latest moves, the average UK house price is £268,000.

You might be wondering why this is lower than the figure reported last month (covering November), which was £290,000. As we reported in our previous post, prices have risen by 4.6% on an annual basis (although they actually fell by 0.1% on a monthly basis).

The main reason for the drop in the numerical figure, though, relates to the way the data is collected.

The ONS explains: “The UK HPI has been re-referenced to reflect the observed reduction in size of the ‘average’ UK property sold and its increased tendency to be in a cheaper part of the UK.”

Rental inflation is slowing but remains “horrible”

The average monthly private rents in Britain are now as follows:

• England: £1,375 (up 8.8% compared to last year)
• Scotland: £995 (up 6.2%)
• Wales: £780 (up 8.4%)

The rate of rental inflation for all three nations has slowed from its peak but remains high.

Sarah Coles, head of personal finance at investment platform Hargreaves Lansdown, said: “Renting makes everything harder, and rising rents are adding to the misery. It puts tenants on the back foot when it comes to every aspect of their finances.

“The Hargreaves Lansdown Savings and Resilience Barometer shows that renters have an average of just £62 left at the end of the month, compared to those with a mortgage who have £309. It means fewer than half have managed to put aside enough emergency savings (46%), compared to three quarters (74%) of those with a mortgage. They’re suffering when it comes to the long term too, because only 15% are on track with their pension.

“While rent rises are slowing, they’re still horrible, and there doesn’t appear to be much hope in sight. While the latest survey from the Royal Institution of Chartered Surveyors showed tenant demand was relatively flat, the number of properties available continued to fall, so rents will keep rising.”

House price inflation likely to slow later this year thanks to stamp duty changes

Despite a small fall in the monthly figure (-0.1%), house prices are proving resilient. An annual growth rate of 4.6% is fairly strong. Richard Donnell, executive director at property site Zoopla, puts it down to “increased sales activity over 2024 and a stamp duty rush in the final quarter”.

Stamp duty thresholds will drop from £250,000 to £125,000 on 1 April, and from £425,000 to £300,000 for first-time buyers. Many have been racing to beat the deadline.

“We expect the rate of growth in the ONS index to slow over 2025 due to much greater choice of homes for sale, up 11% on last year, and higher stamp duty costs for most buyers from April,” Donnell said.

How did the chancellor respond to this morning's inflation print?

A higher-than-expected inflation figure this morning is bad news for beleaguered chancellor Rachel Reeves. She has faced backlash in the wake of the Autumn Budget after announcing a hike to employers’ National Insurance contributions. Critics say this will push inflation up and dampen economic growth.

Responding to the latest inflation figures this morning, Reeves said: “Getting more money in people’s pockets is my number one mission. Since the election we’ve seen year-on-year wages after inflation growing at their fastest rate in three years – worth an extra £1,000 a year on average – but I know that millions of families are still struggling to make ends meet.

“That’s why we’re going further and faster to deliver economic growth. By taking on the blockers to get Britain building again, investing to rebuild our roads, rail and energy infrastructure, and ripping up unnecessary regulation, we will kickstart growth, secure well-paid jobs and get more pounds in pockets.”

UK equities could get a boost, if the BoE and Fed diverge

Although today’s inflation print was higher than forecast (3% versus the 2.8% expected), most economists still expect the Bank of England to cut interest rates around three more times this year.

Core inflation increased from 3.2% to 3.7%, but was in line with consensus estimates. Services inflation increased from 4.4% to 5%, but actually came in below the Bank of England’s 5.2% forecast.

If economists are right, it means the Bank of England will cut interest rates more rapidly than the US Federal Reserve, which is only expected to cut rates around twice in 2025. This could have implications for the pound, which could weaken against the dollar. Higher interest rates typically support the strength of the domestic currency.

Tom Stevenson, investment director at Fidelity International, said: “For investors, even a modest reduction in interest rates should keep downward pressure on the pound because the Federal Reserve looks unlikely to cut the cost of borrowing at the same rate in the US. That should provide a tailwind for the FTSE 100. Exporters and overseas earners which dominate the UK benchmark benefit from weak sterling.”

When is the next inflation report out?

The next UK inflation report will be published on Wednesday, 26 March. This will cover the 12 months to February 2025. If you are looking for any other dates in 2025, check out our calendar of CPI release dates.

Summary

• The rate of UK inflation slowed to 2.5% in December in a surprise drop, down from 2.6% in November.
• Most analysts were expecting inflation to either hold steady at 2.6% or rise to 2.7%.
• The headline figure comes as good news to chancellor Rachel Reeves who has been dealing with the fallout from a gilt market crisis in recent days.
• Easing restaurant and hotel costs were a big driver of the change in the annual rate in December. They are still rising, but at the slowest pace since July 2021.
• This was partially offset by the effect of transport costs. Although this category is in deflation mode, prices are falling more slowly than they once were.

What does the latest inflation news mean for interest rates, households, savers and investors? Scroll for full analysis as it happened.

| What is inflation? | CPI versus RPI inflation | Inflation release dates |

Good afternoon, and welcome to MoneyWeek’s inflation live blog. This is Katie Williams and Dan McEvoy, reporting live ahead of tomorrow’s report.

It has been a whirlwind start to the new year for the UK economy. Just two weeks into January, higher inflation expectations have caused government bond yields to surge, prompting a crisis in the gilt market.

Some are even calling for chancellor Rachel Reeves to step down – although opinions diverge on whether the Autumn Budget or political developments in the US are more to blame.

Will there be better news tomorrow?

Inflation forecast

Economists at Deutsche Bank expect inflation to come in at 2.68% in December, which would be rounded up to 2.7% by the Office for National Statistics (ONS).

Experts at Hargreaves Lansdown also expect the headline figure to inch up.

“Prices at the pumps ticked higher over the month, while food price inflation jumped to 3.7% in December, the highest level since March,” says Susannah Streeter, head of money and markets at the investment platform.

Not all experts agree though. Morningstar has indicated the figure is more likely to remain flat at 2.6%, based on FactSet consensus estimates.

Inflation has fallen considerably from its peak – what’s next?

The rate of UK inflation has slowed considerably from its peak of 11.1%, reached in October 2022. However, new pressures now loom large on the horizon.

For example, employer National Insurance contributions will rise in April after changes announced in the Autumn Budget. The National Living Wage will also rise by 6.7%. Many businesses are planning to pass these higher staffing costs on to customers by putting their prices up.

Wide-ranging tariffs could also be imposed by incoming president Donald Trump if he follows through on his threats. This could disrupt supply chains, creating further costs for businesses.

Consumer Prices Index

To (mis)quote Shakespeare, the course of disinflation never did run smooth.

Reeves is currently in Parliament, where she is being challenged on the gilt market crisis and her decision to continue with a trip to China last week. Read the latest analysis on our gilt market blog.

What is the long-term inflation outlook?

The Office for Budget Responsibility (OBR) has said it expects inflation to average out at 2.6% in 2025. It then expects it to fall to 2.3% in 2026, 2.1% in 2027, 2.1% in 2028 and 2% in 2029.

These OBR figures were published alongside the Autumn Budget in October, but could change if factors on the global stage cause increased geopolitical volatility. Upside risks include Trump’s potential tariffs and an escalation in the Middle East.

What has Trump got to do with UK inflation?

Longer term, economists have warned that policies from the incoming president could push global inflation higher. Let’s take a closer look at how US policies and UK economics are linked.

“US exporters are likely to be hit by higher tit-for-tat duties if Trump introduces widespread tariffs. It’s likely that a fresh round of trade wars will be inflationary as the higher tariffs feed through to higher prices,” says Streeter.

Indeed, many UK businesses operate globally, importing and exporting goods. If tariffs disrupt international supply chains, it will almost certainly result in higher costs for businesses, which may be passed on to customers in turn.

Tariffs could also result in a stronger dollar, which would add to inflationary woes. “Many imports bought on wholesale markets are priced in dollars,” Streeter explains, “which will be more expensive if the greenback takes on more muscle”.

What is the difference between CPI and RPI?

CPI is the official measure of inflation monitored by the Bank of England, but another widely-quoted measure is the Retail Prices Index (RPI). RPI used to be the UK’s official measure until 2003. It tends to track higher than CPI because it includes costs associated with home ownership.

Where RPI does still have relevance is when it comes to setting cost increases for some bills and services. For example, it is used by the government to set annual rail ticket price increases. It is also used to set levies like road tax. Your phone and internet bills could well be linked to RPI too.

RPI came in at 3.6% in November. December’s figure will be released alongside the latest CPI figures tomorrow.

Where are core and services inflation heading?

Both core and services inflation are closely watched by the Bank of England.

Core inflation strips out volatile categories like energy, food, alcohol and tobacco, which allows it to give a more stable picture of the long-term inflation trend. Meanwhile, services inflation tracks price changes in the services sector, which accounts for around 80% of the UK economy.

Deutsche Bank expects core inflation to come in at 3.48% tomorrow, and services inflation to come in at 4.86%. These figures would be rounded to 3.5% and 4.9% by the ONS. This would leave core inflation unchanged compared to November (3.5%), but would constitute a downward movement for services inflation (5%).

Why is services inflation so important?

As introduced previously, the services sector is the biggest part of the UK economy. As a result, tracking price changes in this area can help us understand how embedded inflationary pressures are on a domestic level.

The Bank of England wants to see further disinflation in the services sector before cutting rates dramatically. Services inflation is still coming in quite hot.

Outlook for services inflation

It is possible that services inflation will experience a meaningful slowdown this spring.

As the economists at financial institution ING have pointed out, a large part of the services basket is affected by annual changes in index-linked prices. This includes things like your phone and internet bills. Price hikes generally come into play in March or April, and are often tied to CPI or RPI.

As the overall rate of inflation is considerably lower now than a year ago, bill hikes this year are likely to be less dramatic than last year. This should feed through to the headline services inflation figure.

Energy prices could surge higher in the spring

Although services inflation could slow down in the spring, the tug of war between different parts of the basket will continue. Energy prices are expected to rise further, for example.

The latest forecast from consultancy Cornwall Insight suggests the Ofgem price cap could surge by as much as 3% in April. Experts are blaming geopolitical instability, price cap reforms, and uncertainty over US liquified natural gas exports under a second Trump presidency.

Airfares and hotel costs “weaker” in December

Deutsche Bank’s chief UK economist Sanjay Raja says airfares and hotel costs probably weakened in December. This could contribute to a slowdown in the rate of services inflation. This is good news for consumers looking to book a flight or UK getaway. It is unlikely to mean much to the Bank of England, though.

In their extensive analysis on services inflation, the economists at ING have pointed out that some categories matter less than others. Airfares (which are notoriously volatile) are one such example.

Based on this analysis, the group has created its own metric – “core services inflation” – which strips out certain items. The good news is that ING expects this measure to get close to 3% this spring when things like phone and internet bills come down.

What’s next for UK interest rates?

In recent weeks, markets have been adjusting to the realisation that interest rates could stay higher for longer. It is unsurprising given inflationary risks have picked up – think higher energy prices, UK Budget fallout, and Trump’s tariffs. Gilt yields have surged as a result, creating a real headache for Reeves.

There are still several factors at play, though. If Reeves is forced to cut spending or raise taxes further (an attempt to balance the books in light of higher borrowing costs), it could dampen UK growth.

Tariffs from Trump could also have a negative impact on UK GDP, if production slows as a result of supply chain disruption.

In Streeter’s view, a scenario like this could prompt the Bank of England to cut interest rates a little faster than markets are currently expecting. Indeed, it is worth remembering that the Bank of England has a dual mandate. As well as controlling inflation, it is responsible for supporting economic growth.

What does it mean for your personal finances?

Mortgage rates have increased slightly in recent days in response to the volatility in bond markets. Mortgage rates are closely linked to gilt yields, which have surged higher in response to new inflation risks. The average two-year fixed mortgage rate is now 5.49%, according to Moneyfacts. The average five-year rate is 5.27%.

The savings market hasn’t moved dramatically, but the latest developments have helped to normalise the market “with fixed-term bonds finally offering more interest than easy-access accounts,” says Mark Hicks, head of active savings at Hargreaves Lansdown.

What about annuity rates?

Annuity rates have surged too – a positive development for those thinking about buying a guaranteed income in retirement.

“The latest data shows a 65-year-old with a £100,000 pension can now get up to £7,425 a year from a single life level annuity with a five-year guarantee,” says Helen Morrissey, head of retirement analysis at Hargreaves Lansdown.

“This is up from £7,235 a year last week and up a whopping 48% on the £5,003 that was on offer this time three years ago,” she adds.

What do higher inflation expectations mean for bond investors?

If you are invested in a bond fund, you might have noticed some losses in recent weeks as a result of the selloff. Investors have been selling out of the market in response to inflation fears (inflation is a bond investor’s nemesis). There is also a lack of confidence in the UK economy after the Budget.

As a result, the government is now having to pay more to borrow money. Bonds also become less attractive on the second-hand market when new issuances come with higher coupons, so their price falls.

The silver lining is that higher yields have created new income opportunities. This could create buying opportunities – but remember that markets are notoriously difficult to time.

“You might think that yields could go higher, and you might want to try to time the peak in yields. That’s difficult to do and markets can move quickly, so it could backfire if yields suddenly reverse their current trend,” Streeter says.

Base rate cuts: is market pricing realistic?

Having shared some analysis on what the latest developments mean for your personal finances, let’s return to the UK economy and the outlook for interest rate cuts.

Markets are currently pricing in just 50 basis points of cuts this year – but is that realistic?

“This may sound conservative, but with inflation at 2.6% and services inflation being somewhat sticky, the BoE may not be able to lower rates more than this without upsetting the balance,” says Michael Field, European strategist at Morningstar.

“Markets usually start off overly optimistic at the beginning of the year, and then slowly adjust expectations downwards as the year progresses. However, this time around it appears we might have a realistic number from the off,” he adds.

That concludes our preview analysis for today. We will be back in the same place tomorrow, bright and early, to cover the inflation news as it breaks at 7.00am. Thank you for joining us.

Good morning, and welcome back to MoneyWeek's inflation blog. This is Katie Williams and Dan McEvoy reporting live. There is less than half an hour to go until December's inflation report is released. We will be walking you through it in real time.

Inflation forecast: what are analysts predicting from today’s report?

To recap from yesterday, some analysts believe inflation will hold steady at 2.6% this month, while others (including Deutsche Bank) believe it will inch up slightly to around 2.7%.

Higher food and petrol costs are expected to contribute to any rise, while airfares and hotel costs are likely to have eased.

BREAKING: SURPRISE DROP

In a surprise drop, inflation slowed to 2.5% in December, down from 2.6% in November.

Slowdown in restaurant and hotel costs

The ONS said: "The largest downward contribution to the monthly change in the CPI annual rate came from restaurants and hotels; the largest upward contribution came from transport."

The annual inflation rate for restaurants and hotels was 3.4% in December, down from 4% in November. This is the lowest annual rate since July 2021.

Meanwhile, although transport costs are actually in deflation mode (falling by 0.6% in the 12 months to December), they are falling at a slower rate than they once were. In November, the transport inflation rate was -0.9%.

"The change in the annual rate was mainly the result of upward effects from motor fuels and second hand cars, partially offset by a downward effect from airfares," the ONS explained.

February interest rate cut is not a done deal

December’s drop in the rate of inflation means an interest rate cut is now more likely next time the MPC meets, according to one expert. However, it is far from a done deal.

“While this surprise decline provides some timely respite amid the financial markets turmoil, with the headline rate still decisively above the Bank of England’s 2% target and domestic and international inflation headwinds growing, any relief may be short lived,” says Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales.

He adds: “Despite December’s unexpected decline, the near-term outlook for UK inflation remains ominous with higher energy bills likely to push the headline rate above 3% over the coming months, aided by April’s expected rise in Ofgem’s energy price cap.

“Inflation could drift gradually lower in the second half of 2025, if the likely downward pressure on prices from slowing wage growth and a weakening labour market is not derailed by higher, more volatile global prices.

“While these figures make a February interest rate cut more likely, concerns over the current market turbulence and heightened global inflation risks mean the decision of whether to loosen policy next month is not quite nailed on yet.”

What about core and services inflation?

Core and services inflation made good progress in December. Core inflation fell from 3.5% to 3.2%, while services inflation experienced an even bigger drop from 5% to 4.4%.

Experts including those at Deutsche Bank were expecting these to be higher. The investment bank had predicted rates of around 3.5% and 4.9% respectively.

However, remember that within the services basket, some areas matter more than others. As the economists at ING have argued previously, the Bank of England is less concerned with categories like airfares.

Airfares fell on an annual basis in December. They also eased considerably on a monthly basis, only rising by 16.2% versus 57.1% a year ago.

“It is normal for fares to rise into December,” the ONS explained, commenting on the monthly data. “However, the rise in December 2024 was the lowest December rise since December 2019, and it is the third-lowest December rise since monthly price collection began in 2001.”

Hotel and restaurant costs also slowed considerably in December. Their annual inflation rate came in at 3.4%, down from 4% in November. This is the lowest annual rate since July 2021.

Good news, but GDP numbers could be key

Taken in isolation, the December inflation reading is positive. However, it doesn’t completely eradicate the spectre of stagflation.

“The slight dip in inflation in December is good news and revives hopes that expected rate cuts can still come through this year,” says Ed Monk, associate director at Fidelity International, “but it doesn’t remove the dilemma for the Bank of England or Downing Street.

“Inflation is stubbornly above target while growth has begun to slow down – that’s the path to stagflation. GDP numbers for November, due on Friday, will tell us more about whether the economy shrank overall in the final quarter of 2024.”

Markets are expecting two cuts to interest rates this year, and thanks to the December inflation reading that remains on track. “Higher rates are restricting economic activity, but the Bank clearly still fears any loosening of borrowing costs could let price rises accelerate,” says Monk.

What does the surprise drop mean for your personal finances?

The latest news may bring some comfort to households whose budgets have taken a knock after several years of rapidly rising prices. Those hoping for mortgage rates to come down will be keeping their fingers crossed that it translates into another rate cut in February – although this is certainly not a done deal. Higher gilt yields have actually pushed mortgage rates up in recent days.

“While the better-than-expected inflation figure opens the door for further interest rate cuts from the Bank of England, the drop in the headline rate is only expected to be temporary with inflation edging up again in the coming months,” says Alice Haine, personal finance analyst at the investment platform Bestinvest.

She adds: “With inflationary pressures still evident in the economy and energy prices now edging up again, the knock-on effect this will have on other household bills, such as fuel and food will also be a concern.

“Many households are likely to be feeling twitchy about a potential escalation in bills once again, particularly retirees on fixed incomes, who are already grappling with the government’s decision to scrap winter fuel payments for all but the poorest pensioners.”

House price inflation

House price inflation figures will also be published today, at 9.30am. Official figures from HM Land Registry will show how much prices have risen on a national and regional basis. House price data is published with a two-month delay, so January’s report will cover November.

Inflation still needs to be watched

According to Jonny Black, chief commercial and strategy officer at abrdn adviser, the December inflation dip is “welcome news” but “doesn’t mean inflation won’t be something to watch in 2025.

“A volatile economic landscape is making it hard to say for sure where inflation is going to go next, but the Bank of England’s own forecast suggests that it could stay stubbornly above the 2% target for 2025-26,” added Black.

“This means it will continue to be essential for savers and investors to factor price rises into their financial plans and consider ways to mitigate the impact of inflation on their money, including through investing.”

READ MORE: Is there hope for the UK economy in 2025?

BREAKING: UK house prices increased 3.3% in November

House price inflation figures live

The average house price in the UK during November 2024 was £290,000, implying house price inflation of 3.3% year-over-year. This is up from the 3.0% year-over-year increase that October saw, though, counterintuitively, average house prices actually fell 0.4% month-over-month.

Average house prices increased 3.0% in England and Wales, but 4.7% in Scotland.

Reeves responds to inflation data

Earlier this morning, under-fire chancellor Rachel Reeves issued the following response to the December inflation reading:

“There is still work to be done to help families across the country with the cost of living. That’s why the government has taken action to protect working people’s payslips from higher taxes, frozen fuel duty and boosted the national minimum wage.

“In our Plan for Change, we were clear that growth is our number one priority to put more money in the pockets of working people. I will fight every day to deliver that growth and improve living standards in every part of the UK.”

Markets relieved by falling inflation

The FTSE 100 is up by around 0.7% this morning, as the unexpectedly low inflation data raises hope of a February rate cut.

“The UK inflation snapshot will come as a relief and is already acting like a balm to calm unruly markets,” says Susannah Streeter, head of money and markets at Hargreaves Lansdown. “The FTSE 100 has opened higher as investors appear to have taken some comfort from the easing of inflationary pressures.”

Housebuilder stocks have led the surge, as the prospect of rate cuts is particularly beneficial for the sector. A positive update from Vistry, showing profit guidance is on track, gave housebuilders a further lift.

“Vistry has finally broken its streak of bad news,” said Aarin Chiekrie, equity analyst at Hargreaves Lansdown. “Looking forward, Vistry expects profits to grow in 2025, albeit from a very low base.”

House prices have proved surprisingly resilient

Talking of houses, let’s return briefly to house price inflation and take a closer look at some of the trends that are playing out.

As the below chart shows, the rate of house price inflation is lower than we have seen in recent years. Despite this, prices have now recovered after falling in 2023 and have reached a new peak in recent months (around £290,000). The previous peak was recorded in late 2022 (around £288,000).

Stephen Perkins, managing director at Norwich-based broker Yellow Brick Mortgages, says the latest data “continues to demonstrate the resilience of house prices, as demand remains stronger than expected despite all the misgivings surrounding the economy”.

Demand is likely to remain high in the first three months of the year as buyers rush to move before stamp duty changes kick in on 1 April. Many will find themselves paying more tax after this date. Experts have warned the market could dampen after this point.

Inflation-busting savings accounts

There are currently 1,597 savings accounts that beat inflation, according to financial information company Moneyfacts. This includes:

• 216 easy-access accounts
• 181 notice accounts
• 192 variable-rate ISAs
• 313 fixed-rate ISAs
• 695 fixed-rate bonds

The following providers currently offer the best savings rates, according to Moneyfacts. Their calculations assume a deposit of £10,000 (although some of the deals will be applicable for savers with a smaller balance than this) and show the gross interest rate:

• Easy-access: Chase (4.89%)
• Notice: BLME (4.85%, 90-day notice)
• One-year fixed bond: Vida Savings (4.77%)
• Two-year fixed bond: Atom Bank (4.70%)
• Three-year fixed bond: SmartSave (4.62%)
• Four-year fixed bond: UBL UK (4.54%)
• Five-year fixed bond: SmartSave (4.78%)

Two-thirds of UK retailers planning price hikes

Although inflation dipped this morning, it might prove short-lived with two-thirds of UK retailers planning to hike prices in response to the impending increases in employers' National Insurance contributions. According to a survey by the British Retail Consortium, 67% of retailers said they would raise prices in response to the Budget change.

Odds of a February rate cut from the BoE

Today’s news has boosted the odds of a February rate cut.

“From just 60% predicting a cut at the next meeting, expectations since the ONS figures were released have shot up to over 80% according to Refinitiv data and there is growing optimism that more cuts could be on the cards for 2025 than had been anticipated,” says Danni Hewson, head of financial analysis at AJ Bell.

It isn’t in the bag yet though – and the inflationary headwinds we have discussed previously (potential tariffs, an employer NI hike, and higher energy costs) haven’t gone away.

BREAKING: US inflation higher than expected in December

Inflation data has also been published in the US today. The headline figure hit 2.9% in December, in line with a Reuters poll of economists but above the 2.8% projected by FactSet analysts.

Services inflation could hold the key to Bank of England policy

Cooling inflation raises hopes for interest rate cuts, even though inflation remains above the Bank of England’s 2% target. This is largely because changes in interest rates are recognised as having a lag effect – they take time to be felt across the economy and to manifest in inflation data.

With that in mind, today’s reading “throws a bit more weight” behind hopes of a rate cut in February, according to Dan Lane, lead analyst at trading platform Robinhood.

“The first step in the BoE’s ‘gradual’ easing gradient will feel a lot more comfortable with a nice fall in the all-important services inflation,” says Lane. “The narrative around an expected near-term uplift in headline inflation has been wearing thin, so a 0.25% February cut would at least signal the BoE’s intentions to follow a cutting path with a view to its effects kicking in with a lag.”

When it comes to services inflation, though, it is worth mentioning that some components in the services basket matter more than others. The Bank of England isn’t overly concerned about things like airfares, as the economists at ING have pointed out previously. See our previous post on services inflation for further analysis.

A further softening in services inflation is still required

The Bank’s job is also complicated by the potential impact of US policy. “If the BoE starts cutting and the Fed chooses to pause, it could end up in a sterling selloff, prompting a rise in import inflation,” says Lane.

“To get quarterly cut hopes back on track we really need to see further softening in services inflation but, given how much staff costs weigh on UK services businesses, the rise in employer NI could hinder that progress.”

Inflationary concerns still linger

“The threat of lingering inflation hasn't gone away entirely – so we’re not out of the woods just yet,” says Sarah Coles, head of personal finance, Hargreaves Lansdown.

On both sides of the pond, inflation has remained stubbornly above central bank targets. While it’s hard to predict Trump’s administration with any certainty, there is the potential for his policies to be inflationary, both in the US and globally.

“There has been a lot of negative news building up over the past few months following Trump’s election in the US and UK Budget,” says Oliver Faizallah, head of fixed income research at Charles Stanley, “so concerns around fiscal policy still linger.

“In the UK, it's likely that the CPI miss is not a trend, and we could see [inflation] tick back up again.”

When is the next inflation report?

The ONS publishes official inflation data once a month. The next report covering January will be published on 19 February. See our roundup of CPI release dates for 2025.

That concludes our inflation coverage for today. Thank you for joining us. We will be back with more live analysis in the weeks to come, with a special focus on the US as incoming president Donald Trump takes office. What will it mean for markets and the economy? Stick with MoneyWeek to find out.

Summary

• UK inflation, as measured by the Consumer Prices Index, rose to 2.6% on an annual basis in November.
• It marks the second consecutive month where the rate of price increases has gone up. Inflation came in at 2.3% in October, rising from 1.7% the month before.
• "November’s uptick means that inflation is on track to top 3% by the middle of 2025," according to one economist.
• Separately, ONS data published yesterday shows annual UK wages grew 5.2% in the three months to October.
• Grocery prices are also up, according to Kantar data released last week, with prices rising by an annual rate of 2.6%.
• The final Bank of England meeting of the year will take place on Thursday, 19 December. The Monetary Policy Committee (MPC) is expected to hold rates at their current level of 4.75%.

Scroll for live updates and full coverage.

| What is inflation? | Inflation forecast | When will interest rates fall further? |

Good morning. It’s Dan McEvoy from the MoneyWeek team – welcome to our inflation live blog. There are less than 24 hours to go until November’s inflation figures are released. Stay tuned with our blog from myself and the team for all the latest and expert comments.

Temperatures might be cooling but prices are heating up – and most analysts expect an increase in the headline rate in November.

It comes after the rate of inflation increased from 1.7% to 2.3% in last month’s report, driven by higher energy prices.

November inflation predictions

Most experts think that inflation, as measured by the Consumer Prices Index (CPI) is likely to keep trending away from the Bank of England’s 2% target. September’s reading dipped below this for the first time in over three years, but bounced back above in October, and November’s reading is expected to come in higher again.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, expects tomorrow’s CPI reading to come in at 2.6%.

“Higher tobacco duties and energy bills will be taking a toll,” said Streeter last week. “Our desire for travel has been sending airfares soaring, and with grocery price inflation also heading upwards again, policymakers are once again having to deal with a hotter mess of prices.”

Morningstar, meanwhile, cites a consensus among FactSet analysts that CPI will rise to 2.7%, slightly higher than Streeter’s prediction.

Keep a close eye on our blog today and tomorrow, as we bring you more expert predictions and analyses before and after the 7am release.

Interest rate predictions

It’s a big week for economic news, with the Bank of England also meeting to set interest rates. The MPC will announce its latest decision on Thursday.

The Bank is expected to keep interest rates on ice as we head towards Christmas. The MPC wants to see further progress with disinflation in the services sector in particular.

The Autumn Budget at the end of October also spooked markets, with the chancellor announcing £70 billion in spending plans and £40 billion in tax hikes.

There are fears that some of these policies could prove inflationary, such as the increase to the National Living Wage and the hike to employer National Insurance contributions.

Wages on the rise

There has been an early indicator of the long-term direction that inflation may be travelling in today. The ONS released labour market statistics showing wages increased by 5.2% in the three months to October, or 2.2% when adjusted for inflation.

Wage growth is causally linked to inflation. Not only do higher earnings mean greater spending power (and as such, higher prices thanks to increased demand), but they also increase the costs of production for businesses, who might then increase prices in order to cover these costs.

Whether or not higher wages from August to October will have impacted the inflation reading for November is hard to say, but it could indicate higher inflation in future.

As such, it decreases the (already slim) likelihood of an interest cut on Thursday, regardless of tomorrow’s inflation reading.

“Anyone wondering whether we might get another interest rate cut this week can now be fairly confident it’s going to be off the table entirely in December,” says Streeter.

Charles Stanley: wage growth turns attention to inflation

With wages having increased in the three months to October, the question revolves around how these will have impacted the inflation picture.

“All eyes will be on November’s inflation figures which come out tomorrow,” says Rob Morgan, chief investment analyst at Charles Stanley. “It may represent another interesting test case of the extent to which buoyant wages are being absorbed by companies or passed onto consumers via higher prices.

“This could help the BoE ascertain what the effect will be of higher minimum wages and national insurance costs when they take effect in the New Year.”

Morgan also discusses the impact of October’s Budget on inflation.

“Overall, the Budget has been widely interpreted as adding to inflationary risks, piling costs onto companies, especially, in the hospitality sector. This could drive higher prices in the services component of the inflation numbers in particular.”

Market research company Kantar has foreshadowed tomorrow’s announcement with a review of grocery inflation.

Kantar said last week that grocery prices had increased 2.6% year-over-year in the four weeks to 1 December, up from 2.3% in the previous four weeks. This corresponds closely both with October’s inflation reading and the expectations for November’s figure.

Much of this uptick in grocery spending could be seasonal.

“Many of us take the chance to treat ourselves at this time of year and retailers are rolling out seasonal product lines to help us celebrate in style,” says Fraser McKevitt, head of retail and consumer insight at Kantar. “The proportion of spending on premium own label products reached 5% over the latest four weeks and we expect it to climb even higher in December to nearly 7%.”

Thanks for following the blog today. We'll be back in the morning with the latest inflation figures.

Good Wednesday morning, and welcome back to our inflation live blog. This is Katie Williams. There are less than 15 minutes to go until November's CPI data is released. What will inflation look like – and how will it inform the Bank of England's thinking as it heads into the final MPC meeting of the year? Stick with us for the latest news and analysis.

BREAKING: Inflation rises to 2.6%

The rate of UK inflation rose to 2.6% in the 12 months to November, according to the latest data from the Office for National Statistics.

It is the second month in a row where the rate has increased, after inflation rose from 1.7% to 2.3% in October.

What contributed to the change in the annual CPI rate?

The largest upward contributions in November came from transport and recreation and culture, the ONS revealed.

Overall, eight out of 12 divisions saw upward contributions, partially offset by a downward contribution from restaurants and hotels.

This doesn't necessarily mean prices in these categories are going up. Transport costs are actually falling, but just at a slower rate than they were in last month's report.

Transport costs fell by 1.9% in the 12 months to October, but by just 0.9% in the 12 months to November.

What does it mean for interest rates?

“Inflation ticking up isn’t a present that policymakers had on their Christmas wish lists. It means that we will almost certainly see a hold in the last interest rate decision of the year tomorrow, despite signs that the economy has been slowing down,” says Ben Thompson, deputy chief executive at the Mortgage Advice Bureau.

While the latest news could be seen as the final straw, markets were already confident that the MPC would keep rates on hold at tomorrow’s meeting after reacting to inflationary policies announced in the Autumn Budget.

Yesterday’s wage growth figures didn’t help matters either, accelerating to 5.2% (excluding bonuses).

Core inflation up, but services inflation unchanged

Core inflation, which strips out volatile measures like energy, food, alcohol and tobacco, rose from 3.3% to 3.5%.

Services inflation remained stable at 5%, though. This is one of the most important metrics for the Bank of England, as services account for around 80% of the UK economy.

While the Bank will be pleased to see services inflation hasn't risen any higher, Tom Stevenson, investment director at Fidelity International, points out that it remains "well above target".

A headache for Labour?

The latest CPI data could create another headache for the Labour government. Chancellor Rachel Reeves has faced criticism in the wake of the Budget, after several of her policies were deemed inflationary.

What's more, there could be further pain ahead, according to Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales.

He says: "November’s uptick means that inflation is on track to top 3% by the middle of 2025, with tax rises in the Budget and elevated energy costs likely to increase the upward pressure on prices in the near term.

“The rise in core inflation will make for slightly difficult reading for policymakers, as it suggests that underlying inflationary pressures in the much of the economy are not yet fully under control.

“This inflation increase extinguishes any lingering hopes of an interest rate cut on Thursday while concerns over mounting inflation risks, including the recent spike in pay growth, mean that a February loosening is not a done deal."

What does the latest inflation data mean for savers?

The latest news might be the nail in the coffin for a December interest rate cut, but that doesn't mean it is good news for savers.

"Higher inflation means savers should review how their money is positioned to protect against its impact on the real value of their savings," says Adam Thrower, head of savings at Shawbrook, the UK bank.

"It’s a hectic time of year, but taking a moment to review your savings could help ensure your money continues to work hard and stay shielded from inflationary pressures in the year ahead," he adds.

Savings rates have been tumbling in recent months, and 5% deals on easy-access accounts have now disappeared entirely. The top rate savers can earn is now 4.85%, according to comparison site Moneyfacts.

Although the Bank of England is unlikely to cut the base rate tomorrow, now could be the time to think about fixing a portion of your savings to lock in higher rates for longer. The top one-year fixed-rate account pays 4.65%, guaranteed for a year. Just remember you won't be able to access the money until the end of this period.

Reasons to be cheerful

As we head into the festive season, some economists point out that there are at least one or two reasons to be cheerful.

"Inflation wasn’t quite as strong as some were expecting," says Sanjay Raja, chief UK economist at Deutsche Bank.

"Indeed, while headline CPI came in at 2.6%, core CPI was a tenth lower than expectations," he adds.

Furthermore, although services inflation remained high at 5%, Raja says this was also a tenth lower than consensus expectations.

Victory over inflation still "some way away"

As we head into 2025, the increase to employer National Insurance contributions could weigh on the inflation outlook.

Raja says employers are likely to "start ramping up prices at the start of the year" to account for the additional cost.

"The MPC will be cognisant of this heading into its final decision of the year. Put bluntly, the MPC is some way away from declaring victory on inflation," he adds.

Reeves responds to inflation reading

Chancellor of the exchequer Rachel Reeves, who has come under fire for including potentially inflationary policies in her Autumn Budget, has issued a response to today’s inflation reading.

"I know families are still struggling with the cost of living and today’s figures are a reminder that for too long the economy has not worked for working people,” said Reeves.

“I am fighting to put more money in the pockets of working people. That’s why at the Budget we protected their payslips with no rise in their national insurance, income tax or VAT, boosted the national living wage by £1,400 and froze fuel duty.

"Since we arrived real wages have grown at their fastest in three years. That’s an extra £20 a week after inflation. But I know there is more to do. I want working people to be better off which is what our Plan for Change will deliver.”

How has the stock market reacted?

The FTSE 100 opened up 0.24% this morning.

This is a little surprising – as Tom Stevenson, investment director at Fidelity International, says, “the lack of domestic growth and persistent inflation makes it harder to spot the catalyst for a re-rating” for UK equities.

That said, the consensus among analysts was that the headline figure would be 2.7%, marginally ahead of the actual result. It appears that investors had priced this in, so the 2.6% figure, while only marginally lower, has prompted a small sigh of relief from investors.

“The UK stock market remains one of the cheapest in the developed world,” says Stevenson.

Hargreaves Lansdown’s Investor Confidence survey shows increasing confidence in British equities.

“Confidence in the UK stock market has risen in December, up 6% on the previous month,” says Emma Wall, head of platform investments at Hargreaves Lansdown. “Despite recent FTSE 100 weakness, the index is up more than 6% year to date, and smaller companies as per the FTSE 250 index have also posted positive returns – up 5%.

What’s driving transport costs?

While not rising in the year to November, a deceleration in transport costs falling is one of the key factors behind the uptick in inflation.

Sarah Coles, head of personal finance at Hargreaves Lansdown, explains how global oil prices have applied upward pressure to transport costs:

“Transport helped drive inflation up, because petrol prices were higher. The oil price fluctuated throughout the month, partly on the back of geopolitical tensions, but also as a result of the market digesting the likely impact of a Trump presidency on supply and demand.

“During the month, the average price of petrol rose by 0.8 pence per litre and the average diesel price was up 1.4 pence per litre. It’s still far lower than a year earlier, with petrol down 10.7% and diesel down 11.6%. However, the annual drop is smaller than before, which is why it helped push inflation up.”

What does higher inflation mean for your mortgage?

The most direct impact on mortgages will come tomorrow, when the Bank of England announces its next interest rate decision. As a reminder, given the uptick in inflation as well as the unexpected increase in wages, it is highly unlikely that it will cut rates; most experts expect rates to be held at their current level of 4.75%.

However, the inflation reading could indirectly affect fixed-rate mortgages even with the base rate unchanged, though it is unlikely this effect will be significant.

“Mortgage rates have struggled to settle in recent weeks, with each piece of economic news – and each utterance from the Bank of England – sending rates slightly up or down within a fairly narrow range,” says Coles. “Higher inflation is likely to mean another small fluctuation upwards in fixed rates, but given that rate expectations should remain largely unchanged, there’s every chance it’s nothing to write home about. We could see average two-year fixed rates remain about the 5.5% point.”

What's going on with house prices?

UK house price inflation came in at 3.4% in the 12 months to October, according to separate official figures released today.

House prices are now within touching distance of the record high achieved in August this year, having spent much of the past two years in recovery mode.

Some of the change could be being driven by impending tax changes, though, with buyers rushing to buy before stamp duty thresholds fall in April 2025. This could add thousands to the cost of moving house.

Inflation: the longer-term outlook

Today’s data reflects what has happened to CPI over the past 12 months. The bigger question, though, is what’s likely to happen going forward.

This is of course hard to predict with certainty, but as Rachel Winter, Partner at Killik & Co says, “there are a few factors that could be inflationary; the new tax hikes on businesses and potential trade tariffs from the US could pose a threat to the Bank of England’s 2% inflation target”.

The second Donald Trump administration in particular could cause an inflationary headache for British policymakers. “There are inflationary concerns surrounding what Donald Trump’s reprise as US President might mean for global supply chains,” says Rob Morgan, chief investment analyst at Charles Stanley. “Should he look to expand his tariff approach there could be a significant impact on the costs of global trade.”

Why the inflation “rebound” might be misleading

It’s tempting to view the jump in CPI readings between October and November as a reflection that prices have increased significantly during the month, but this isn’t the case.

October’s figure means that prices rose 2.3% in the 12 months to October 2024, while the latest reading shows they rose 2.6% in the 12 months to November.

Month-over-month, however, prices rose just 0.1%. This actually implies a slowing in inflation from the previous month (0.6%).

George Lagarias, chief economist at Forvis Mazars, explains: “The 2.6% year-on-year inflation figure, which suggests a rebound, may be slightly misleading. For November, prices were up just 0.1.%, a sixth of the rise we saw in October.”

As a result, Lagarias doesn’t view this latest figure as particularly significant, and says the Bank of England "should not worry" about it.

Join us for interest rates tomorrow

That concludes our inflation coverage for today. Thank you for joining us on MoneyWeek's live blog. We will be back tomorrow, reporting live as the Bank of England announces its latest interest rate decision. Hop over to our interest rates live blog for preview analysis from today.

The average cost of Christmas dinner has risen by 6.5% as analysis shows that grocery price inflation rose again in November.

According to data from retail analysts Kantar, grocery inflation increased at an annual rate of 2.6% in the four weeks to 1 December, up from 2.3% in the previous month.

The jump has further dampened hopes of another interest rate cut from the Bank of England before the end of the year.

Kantar said that sales at supermarkets and other grocery stores rose by 2.5% in the four weeks to 1 December as shoppers prepared for Christmas.

Fraser McKevitt, head of retail and consumer insight at Kantar, said: "Monday 23 December is likely to be the single busiest day for the supermarkets this year, although there are clear signs that shoppers are already stocking up their cupboards."

When might interest rates fall further?

The jump in grocery price inflation, on top of other factors, means another interest rate reduction in December at the Bank's next Monetary Policy Committee meeting looks unlikely, based on market expectations. This means interest rates will probably end the year at 4.75%.

Market participants have dialled down their bets after watching the Budget play out. Chancellor Rachel Reeves announced £70 billion in spending policies – an attempt to boost investment in the UK economy and prevent department cuts.

“The increases in government spending and investment announced in the Budget are taking place at a time when the economy is already operating close to capacity,” says Paul Dales, chief UK economist at the consultancy Capital Economics.

“In that situation, the faster rates of GDP growth we expect in light of the Budget will probably spill over into larger rises in prices than we previously thought,” he told MoneyWeek.

The team at Capital Economics previously expected inflation to average out at 2.6% in 2025 and 2% in 2026. They have now adjusted their inflation forecasts upwards slightly to 2.8% and 2.1% respectively.

Reeves unveiled £40 billion in tax hikes in her fiscal statement, with a large part of this coming from an increase to employer National Insurance contributions. Commentators have said this could contribute to higher inflation if businesses pass the costs on to consumers by putting their prices up.

The National Living Wage is also set to rise by 6.7% from April. This is good news for employees but will contribute to rising costs for some businesses. It could also contribute towards wage growth staying high. Wage growth is another driver of inflation.

Even before the Budget, onlookers were expecting less positive inflation figures towards the end of the year. In the latest poll from news agency Reuters, almost two-thirds of economists (46 out of 72) said they expect rates to be kept on hold at the meeting in December.

UK inflation was unexpectedly steady in May, but experts warn that higher inflation could be on horizon as the UK starts to feel the economic consequences of the Iran war.

Inflation was 2.8% in the year to May, holding at the same level it was in April, according to the latest data from the Office for National Statistics (ONS).

Most experts had anticipated price growth to rise after oil and gas prices soared in the wake of the Iran war.

However, the economy proved to be more resilient than most expected. One driving factor in May’s data was low food inflation.

In the year to May, food prices grew by 2.2%, the slowest rate in 17 months. This helped push overall inflation down by 0.07 percentage points.

Other notable downwards contributions to the inflation rate came from the housing and household services, furniture, clothing, restaurant, and recreation sectors.

Meanwhile, the largest upwards contributor was the transport sector, where inflation was 6.8% in the year to May. Price growth for airfares, vehicle taxes, and motor fuel costs pushed May’s overall inflation up by 0.29 percentage points.

However, while lower-than-expected inflation in May was a positive sign, experts have warned that low inflation is unlikely to hold.

Where could inflation go next?

Experts think inflation is likely to rise in the following months as we continue to feel the effects of disrupted global trade thanks to the Iran war.

In particular, the war led to the Strait of Hormuz, a narrow waterway between Iran and Oman through which around 20% of the world’s oil and gas is transported, being shut.

That made oil prices surge, impacting motor fuel and heating oil prices. But as oil is used in the production of a significant portion of the things we use and buy every day, price shocks will likely be felt more widely.

While the Iran war looks to be winding down, with a memorandum of understanding set to be signed, oil prices have fallen. However, it will still be some time before they go back to pre-war levels as the production and distribution of oil needs to be restarted.

With prices remaining at elevated levels, inflation will still likely tick up in the UK during the rest of the year.

Meanwhile, the energy market is also under pressure because of the war.

Energy bills for millions of households and businesses will increase in July when the next Ofgem energy price cap comes in.

The new cap will reflect the increased wholesale price of energy because of the war, meaning households on the price cap will be paying an average of 13% more for their energy than they did between April and June.

Prices are set to stay high in the final quarter of 2026 too, with energy consultancy Cornwall Insight, whose price cap forecasts are well-regarded, expecting the price cap to rise by a further 2% in October.

Before the war, the consultancy thought energy prices would be around £1,645 in July this year – more than £200 lower than July’s confirmed level.

The UK is particularly sensitive to the wholesale energy market because it is a net importer of energy from overseas, meaning it is left at the whim of the market to set prices.

Moreover, even firms that do not produce goods derived from oil and gas markets will likely need to hike prices as the costs associated with running the business (such as energy bills and transportation costs) are still exposed to those markets. These costs will likely be passed on to the consumer.

Where do experts think inflation will go?

Unfortunately for Brits, most economists are united in thinking that inflation will rise for the rest of 2026.

The latest forecast from the Bank of England estimates that inflation will stay just under 3% for most of 2026 before rising to a “little over” 3.25% in the final quarter of the year.

While this means that inflation is likely going to stay well above the 2% target for the rest of the year, the positive news is that this latest prediction is significantly better than the one produced by the central bank in April, which said prices could peak at 3.6% this year in their best-case scenario or 6.2% in their worst-case scenario.

Deutsche Bank expects inflation is set to rise in 2026, but to a less extreme peak than previously thought.

Sanjay Raja, chief UK economist at Deutsche Bank, said: “With a US-Iran [memorandum of understanding] in sight, the prospects of a softer rise in CPI have increased.

With oil prices dropping meaningfully, this is expected to slowly filter through to the overall inflation data over the summer and winter, helping it stay lower than previously expected, he said.

Raja added: “And, in even better news, the fall in oil prices has coincided with a fall in gas prices. It’s looking increasingly likely that the Ofgem price cap could be lower as opposed to higher come October 2026, bringing some much-needed relief for UK households and businesses.”

While this news is positive for the inflationary outlook in the UK, it all rests on the assumption that inflation will still be above target for the entire year.

And though expectations are now far from April’s worst-case scenario, it still means prices will accelerate one percentage point faster than many economists had previously expected in 2026.

What’s the link between inflation and interest rates?

Inflation above the 2% target is always a cause for concern for economists, policymakers and consumers.

The Bank of England is particularly focused on inflation, as it has a remit to ensure prices do not spiral out of control.

This is largely done through setting interest rates, which are typically raised to fight inflation.

The trade-off to fighting inflation with higher interest rates is reduced economic activity. When interest rates are high, people have to use more of their earnings on expenses like their mortgage and are incentivised to save their cash as savings rates tend to be higher.

What does the inflation outlook mean for future interest rate cuts?

With inflation expected to stay significantly above the Bank of England’s target, interest rates are unlikely to be cut any time soon.

In the most recent meeting of the Monetary Policy Committee on 18 June, members decided to hold interest rates at 3.75% for the fourth consecutive meeting. The motion passed by seven to two.

The two members who did not vote with the majority (Huw Pill and Megan Greene) voted to hike rates to 4% as a preventative measure against the potential for more severe second-order inflationary effects.

This move was in line with most forecasts by economists, and experts believe that interest rates will stay at 3.75% until at least early 2027.

Deutsche Bank believes that the first time we could potentially see a rate cut on the table again is spring 2027. Meanwhile, Oxford Economics believes that the first cut may be seen in late 2027.

For more on the future of interest rates, read our article on where interest rates will go next.

The gnostic utterances of Jerome Powell, chairman of the American central bank, are these days pored over ever more intently by investors and analysts seeking to divine the future direction of interest rates. And for good reason: the interest rate set by the Federal Reserve is the most important number in the financial markets. The US is the world’s most important economy and its markets set the tone for global asset prices.

What investors want to know above all is the likely future direction of the Fed’s “benchmark federal funds rate”, the rate at which banks borrow from each other overnight, which in turn is deemed to have a powerful influence on other interest rates, including those paid for business or personal loans or mortgages, or earned on savings. Globally it will have a big impact on whether money flows into or out of emerging markets, for example, with knock-on effects everywhere.

In short, the number the Fed comes up with has a big influence on whether the world is making as good a living as it could be. If businesses are going to make new investments to produce more or become more productive or make a venture into new products or services, they need households and other savers to supply the capital to finance it. Balanced, stable growth demands that total investment in the economy be equal to the pool of available capital or savings.

For that to happen, interest rates need to be high enough to convince savers to save and low enough to incentivise borrowers to borrow, as the Brookings Institution explains. The interest rate that achieves this over the long run is known as the “neutral rate”. The Fed sets the rate above the neutral rate if it wants to cool an economy it thinks is overheating or below it if it wants to stimulate a flagging economy. It’s vital that the price is right.

It would seem to be a bit of a problem, then, that central bankers and other economic experts can’t agree on what the neutral rate actually is. It has long been the subject of intense debate, one that heated up in recent years as economists disagreed over whether the higher interest rates introduced post-Covid to restrain inflation had gone too high and were hence holding the economy back. The neutral rate – also known as the long-run equilibrium interest rate, the natural rate, or r* – is defined as the short-term interest rate that would prevail if the economy were at full employment and inflation stable, and if monetary policy were neither contractionary nor expansionary. In the long run, it is determined by the supply of and demand for savings.

But it is a theoretical concept, not something that can actually be observed in the wild. The Fed does not set the neutral rate, it just tries to estimate what it is. Economists use different models to try to pin it down, and estimates of what it might be vary. Some even insist that it doesn’t exist – that it makes no sense to try to estimate a single, economy-wide interest rate. That would be awkward for the Fed, which bases its most important decisions on some measure of it.

All of which goes to illustrate a puzzle about our societies – that monetary policy, as practised in the US, the UK and many other countries, assumes that central bankers, as central planners, can do a better job than financial markets in setting rates that will maximise economic output and stability while keeping a lid on inflation, even if they are, as they must be, flying blind. Why? We don’t have a central authority to set the price of food or shoes. Why do we need one to set the price of money and retain monopoly control over the supply of it? Why not privatise money?

Is there an alternative to central banks?

The idea that central banks are a necessary feature of modern economies has long “reigned supreme and is virtually unquestioned” in economics, as Kevin Dowd points out in The Experience of Free Banking (IEA, 2023), a collection of essays reissued last year. Even economists who are generally sympathetic to laissez-faire, such as Milton Friedman, accepted that money and banking could not just be left to markets. The issue of the national currency was deemed to be a “natural monopoly” that was properly the responsibility of the state, or more recently of central banks under the auspices of the state. There has, of course, been plenty of controversy over how much power the central bank should have and just what it should do, as Dowd points out, but no respectable economist suggested that central banks should be abolished – until, that is, Friedrich Hayek suggested in 1976 that the only way to achieve monetary stability was to “denationalise money”.

The most extreme version of the theories that developed following his suggestion advocates the abolition of central banks and the introduction instead of a system of “free banking”, defined as a system in which private banks are free to issue their own money under competitive conditions, typically convertible into gold or some other commodity standard, and in a legal environment in which the public is free to accept or reject bank currency as they see fit. That might sound impossibly radical, but following Hayek’s suggestion a major research effort revealed that free-banking systems had existed in the past and that they had indeed a long and respectable history. Dowd’s book presents an overview of the world experience of free banking, with examples from Australia, Belgium, Canada, Chile, Colombia, China, France, America, Italy, Sweden and Switzerland.

Perhaps the best-known example, however, is Scotland prior to 1844, thanks in part to Adam Smith’s assessment in The Wealth of Nations that its free banking system had contributed in a major way to the country’s economic development. In 1745, says Dowd, per capita income in Scotland was about half what it was in England at the time. A century later – a century that corresponds to the heyday of Scottish free banking – Scottish per capita income had risen to almost English levels despite England’s own rapid growth, and despite suffering a number of disadvantages, such as greater distance to markets, inferior infrastructure and fewer raw materials.

Competition between the free banks was fierce, and the fight for market share honed bankers’ liquidity and capital-management policies, their entrepreneurial skills and willingness to innovate. Banks provided commerce and industry with easy access to credit that was both inexpensive and relatively easy to obtain, provided the public with loans and monetary notes that were more convenient and easier to hold than coins, and promoted habits of thrift by offering them higher returns on their savings than they could obtain elsewhere.

Walter Scott wittily defended the Scottish system against its detractors in a way that might remind you of those economists beavering away in the Fed: “Here stands Theory, a scroll in her hand, full of deep and mysterious combinations of figures, the least failure in any one of which may alter the result entirely, and which you must take on trust … There lies before you a practical System, successful for upwards of a century. The one allures you with promises, as the saying goes, of untold gold, the other appeals to miracles already wrought in your behalf. The one shows you provinces, the wealth of which has been tripled under her management – the other, a problem which has never been practically solved. Here you have a pamphlet – there a fishing town – here the long-continued prosperity of a whole nation – and there the opinion of a professor of Economics, that in such circumstances she ought not by true principles to have prospered at all.”

The historical experience of free banking, both in Scotland and around the world, shows that the conventional wisdom about what would result from such an experiment must be rejected, concludes Dowd. Free banking systems were not in fact prone to inflation, competition did not destabilise them, and there’s some evidence that interest rates were more stable. The banks had to be careful and prudent in their lending, reserve and capital policies because they could not expect others to shoulder their losses or bail them out. Banks did sometimes fail under these laissez-faire conditions, but the failures do not appear to have been seriously contagious and major crises were rare. Indeed, where such crises did occur, they could usually be attributed to state pressure for cheap loans from the banks, which undermined their financial health, or to other forms of state intervention. Free banking – as in Scotland, for example – generally ended, says Dowd, because it was suppressed for political, fiscal or ideological reasons, and not because of any inherent flaws.

Walter Bagehot deemed central banking irreversible. Economic historian Charles Kindleberger noted a “strong revealed preference in history for a sole issuer” of currency. But the preference that history really reveals is that of the fiscal authorities, not of money users, as Lawrence White and George Selgin, two of the authors in Dowd’s book, have pointed out. In some places, such as London, free banking never received a trial for that reason. “Central banks primarily arose, directly or indirectly, from legislation that created privileges to promote the fiscal interests of the state or the rent-seeking interests of privileged bankers, not from market forces.”

Could it happen again?

Does any of this have relevance to the modern world? The historical record, according to the free banking advocates, shows that free banking, unlike the system of central banks, is not prone to inflation or banking instability. Those are features that would seem to be worth having. And if it worked in the past, then why not now? In theory, it seems, none at all. But there’s the small matter of the real world. Free banking, as Dowd admits, is not in the so-called “Overton Window” – that narrow range of policy options deemed to be politically possible. But even were that window to shift – as happens especially during crises – the case for free banking to date has relied heavily on theoretical arguments and history drawn from the 18th and 19th centuries, as a 2012 paper from the Cato Institute by Gerald O’Driscoll pointed out. However persuasive the arguments, they would come up against institutional inertia. Even if we agree that it would have been better if central banking had never been, the cost/benefit calculation for abolishing it has not been convincingly made.

The world of old in which free banking thrived is simply not the one we live in. None of the examples in Dowd’s book, extend far into the 20th century. The world in the preceding centuries was not as deeply interconnected through the financial system as it is today, and any proposal that we change that system must start from where we are – which is not a blank page, but a world where the incredibly complex, regulated, scaled-up infrastructure of modern banking already exists. And it works: the world with central banks is in many ways a better place than it was just a few generations ago and it continues to deliver material progress. Is it really sensible to think now about beginning anew? How would the change be carried out, and at what risk? Which piece of this complicated Jenga of a system would you pull out? And once pulled, just how confident are we that what will result will be stable? Even if it wobbles and doesn’t fall, will we be left with a structure that is radically better than what stood before? Is it worth playing the game given the risks we can think of, not to mention the unknown unknowns?

Under the current system, for example, we have instant transfer of capital, and relatively unfettered global trade in goods and services, where we pay for goods in our own currencies into a foreign bank account and don’t even need to think about all the complexities. How would that work under free banking? Will my pound from NatWest be accepted in the US, and how many pounds from HSBC is it worth? Will each bank have different exchange rates? The system instantly becomes incredibly more complex, increasing trade friction and transaction costs. Imagine we did in fact live in such a world. Wouldn’t a simpler system, where there is centralisation and central banks, to help ease some of these issues, seem very attractive?

It’s far from obvious, in short, that it would be worth the bother and risk of switching from central banks to an alternative system that has not been tried in the modern world, and this fundamental problem is not one addressed very deeply by free banking advocates. Perhaps that’s why the Fed is still fumbling around in the dark for a number that might not even exist. There’s simply no alternative.

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If you read the financial news this week you will see that everyone is talking about interest-rate cuts. The most prominent discussion on this topic is in the US, in the run-up to the election. Supporters of the Democratic Party have been crying out for the US Federal Reserve to lower interest rates, and at the end of September, the Fed obliged, handing the incumbent party a large 0.5% decrease in borrowing rates. Whether this will feed through to the economy by election day is doubtful, but it certainly gives those looking to take out mortgages in the near future some economic hope.

Now “lower-rate fever” is spreading to Europe. In this case, politics are not playing a leading role in the debate. Rather, technocrats and investors want to get back to what used to be called the “new normal”, but which is starting to feel like the old normal: stagnation, permanently low rates, and occasional bouts of monetary easing. Clearly both the technocrats and market participants have realised over the past few years that although economic stagnation and low rates might not be optimal, they are preferable to economic stagnation, inflation and interest rate hikes.

What will happen to interest rates?

Investors are now talking openly about interest rates in Europe halving by this time next year, falling from 3.5% to 1.75%. This follows from the annual rate of European consumer price inflation falling from 2.2% in August to 1.8% in September, meaning that for the first time since June 2021, inflation in Europe has been below the European Central Bank’s 2% target.

The broader economic backdrop looks grim for Europe too, with Citi Group’s economic surprise indicator being underwater since the summer (negative surprises in the data are outweighing positive ones); investors do not have very high hopes for Europe’s economy now, but the data is disappointing even those inclined to low spirits.

But this could be an instance of investors being lulled into a false sense of security. Just as market watchers are eager to get back to the old-new normal of low interest rates and stagnation, they want to put the geopolitical shocks that caused the recent inflation – namely, the Covid lockdowns and the Russia-Ukraine war – behind them. Yet when we turn the page of the newspaper from the economy to foreign affairs, we see that the Middle East is a tinderbox – a single spark could set it off. As the Scottish poet Robert Burns once observed, the best-laid plans of mice and men can often go awry – and he could well have been referring to those who are hoping our economies settle back into a sadly stagnant, but uneventful, calm.

Impact of a wider Middle East conflict on global markets

The increased risks have been there in the Middle East since Hamas launched its attack on Israel on 7 October last year. The response from the Israeli government immediately signalled that it was not willing simply to return to business as usual; it was committed to the eradication of Hamas. At the time, those following the situation closely noted that Hezbollah, an ally of Hamas based in Lebanon, to the north, was also engaged in a campaign against Israel, one that has resulted in the Israeli government evacuating 60,000 people from their homes in northern Israel. This situation was clearly intolerable to the Israelis and led many to suspect it would result in a war against Hezbollah, a war that we are now seeing the beginnings of.

Markets had been dismissing these risks for months. They had been banking on the idea that the conflict would remain contained. In effect, that means they had been relying on the assumption that Israel would merely continue its campaign against Hamas and would not expand the front to the north. However, Israel did open a northern front and, shortly after, we gained a sense of why this risked escalation to a regional war: in response to the assassination by Israel of Hezbollah leader Hassan Nasrallah, Iran – an ally of the group – launched a large missile strike against Israel in early October.

Unless one side backs down, the situation in the Middle East now looks ripe for continuous escalation, with one fighting force hitting the other, and the other responding in kind. It is no longer tenable for markets to ignore this risk, and since the Middle East is central to global energy markets, investors need to be realistic about the potential for another round of inflation driven by yet another energy shock. We are already starting to see price action in this direction in the oil market with the price for Brent having recently risen from a low of $70 a barrel in early September to $80 a barrel just after the Iranian strike – although it has since fallen back.

How important is the Middle East to global energy markets?

The region accounts for approximately 18% of global gas production. Since the outbreak of the Russia-Ukraine war and the consequent disruptions, this has made the region a more important player in the European liquefied natural gas (LNG) market. But it is still the production and export of crude oil where the Middle East excels: the region comprises 32% of global production and has 40% of the world’s proven oil reserves.

Five of the ten top oil producers are in the Middle East: Saudi Arabia, Iraq, Iran, the United Arab Emirates and Kuwait. What is more, these countries have a much larger impact on the global oil price than larger producers, like the US. The reason for this is that while the US produces large amounts of oil, it consumes even more. Middle Eastern countries, however, typically produce much more oil than they consume.

Even though the US is the largest oil producer in the world, its net oil output – oil production minus oil consumption – is around minus 6.7 million barrels per day, meaning the country runs a large crude oil deficit. Net oil production in Saudi Arabia, on the other hand, is 4.5 million barrels a day.

From “destabilising” to “catastrophic”

How might this oil production be affected by conflict in the Middle East? The scenarios here range from “destabilising” right up to “catastrophic”, depending on what takes place in the coming weeks and months. A destabilising series of events would unfold something like this: Israel would respond to Iran’s strike with a counterstrike on Iran’s energy infrastructure, which would in turn prompt Iran to respond to Israel.

This might then result in instability or strikes in other countries like Iraq and Syria. In this scenario, around 10.4% of global oil production would be at risk. Of course, not all 10.4% would be taken offline, but even if only a quarter of this output was removed from markets there could be a large impact on prices.

The nightmare scenario – the truly catastrophic event – would be if the strikes and counterstrikes eventually gave way to a regional war in the Middle East involving Israel, possibly the US, and Iran, plus its proxies in the region. If this war reached any serious level of intensity there is a serious risk that the Iranians would use anti-shipping ballistic missiles to blockade the Strait of Hormuz, much as the Houthis have recently blockaded the Red Sea entrance to the Suez Canal. Around 20%-30% of global oil production is shipped through the Strait of Hormuz and a closure, together with a regional war, could knock out a significant part of this capacity.

The last time we saw a significant hit to global oil production was after the Iranian Revolution in 1979 and the Iran-Iraq War that followed. Between 1979 and 1983 global oil production fell approximately 17%. As production started to crater, the markets priced it in quickly: between 1979 and 1980 the price of oil nearly tripled. We saw a similar move in the oil price in response to the oil embargo by Opec, the oil exporters’ cartel, against Western countries in 1973 after they backed Israel in its war with the Arab countries.

The impact on consumer prices

What would a tripling of the price of oil mean today? First, it would mean a rise in the oil price to around $210 a barrel. This would mean the most expensive oil the world has ever seen, at least in dollar terms; $210-a-barrel oil would be around 58% higher than the historic peak we have seen so far – $133 a barrel in the summer of 2008. Even if a major decline in oil output did not lead to shortages, it is inevitable that such high oil prices would lead to inflation.

The link between oil prices and inflation is quite firm, with oil price fluctuations often accounting for a good deal of the volatility we see in inflation. This allows us to model the impact that $210-a-barrel oil would have on the inflation rate. The result of this model is by no means perfect, but it is almost certain to be in the right ballpark.

$210-a-barrel oil means inflation of around 18% in the US and 19% in the UK. Despite the high and painful inflation of the past few years, we never saw the inflation rate break 10% in either country. If our model is in the right ballpark, a crisis in the Middle East would mean roughly double the inflation that we have seen over the past few years. The impact of such inflation on living standards in Western countries – already reeling from the last cost-of-living crisis – would be enormous.

Gauging the probabilities

What are the chances of this happening? It depends mostly on what the Israeli government chooses to do next. If it responds to the previous Iranian strike in a measured way, the situation might cool off – although even in this scenario, it is worth noting that while the conflict has ebbed and flowed over the past year, the general trend has been toward escalation. If Israel responds by hitting Iranian energy and nuclear facilities, then at the very least we will see the conflict spread across the region. Whether it becomes a regional war at that point likely hinges on what the US decides to do.

This is where the election comes in. In the run-up to the election itself, Joe Biden’s administration is likely to constrain itself – and its Israeli partners, as best it can. But after the election, it is anyone’s guess. If Donald Trump wins, for example, the Biden administration may give Israel the go-ahead to escalate knowing that the economic consequences will fall on the incoming Trump administration – a government generally seen as more favourable to Israel than the Biden administration. If Kamala Harris wins, it will be strongly in the Democrats’ interest to keep the situation from boiling over. Ultimately, however, trying to guess what the White House will do is as fruitless as the Kremlinology common in the Cold War period. We will just have to wait and see.

Black gold: hedging against inflation

What are investors to do? This is certainly one of those scenarios where there is little point in trying to predict the future. If an investor is concerned that their portfolio might experience a negative shock from such a global event, the ideal is to find a series of relatively cheap hedges that might offset this.

In this context “cheap” simply means assets that are not likely to fall too much if nothing happens in the Middle East. These assets provide significant upside risk in the case of chaos breaking out and minimal downside risk in the case where nothing happens.

The most obvious cheap asset in this regard is oil itself. Despite all the chaos, and even despite the upward moves in recent weeks, the price of oil is surprisingly low at present. The previous oil price shock had largely unwound by the start of 2023. Since then, the average price has been approximately $78 a barrel. Anything under $78 a barrel should be considered cheap. The longer-term average oil price since 2009 is around $71.50 a barrel and anything under this should be considered very cheap. Buying oil cheap minimises the downside risk of losing money if nothing happens.

Then there is gold. In contrast to oil, gold is not currently cheap. At close to $2,650 an ounce, gold is the most expensive that it has ever been. Yet there is good reason to think that the shiny metal is not in a bubble. Until quite recently the gold price could be shown to track inflation data quite reliably. But in the past few years, it has found a second driver: purchases by central banks. Rattled by the sanctions imposed on Russia’s dollar and euro foreign-exchange holdings after the war, central banks are rushing to buy gold, and this is driving the price up.

It seems reasonable to think that if the Middle East falls into chaos, central banks will double down on this bet. And if high oil prices feed into inflation, this could give gold a double boost. Purely based on price, gold does look very expensive – and investors should weigh this risk carefully. But the drivers of the price suggest that gold is on the up and up, regardless of what happens in the Middle East. Whereas buying oil now is like buying a stock with low multiples, opting for gold right now is like buying a popular growth stock with strong fundamentals.

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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.

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.”

Inflation has topped a list of risks to investment portfolios, according to a survey of UK investors. It beat a slow economic recovery in the UK and geopolitical conflict to come out as the biggest concern among investors.

The poll comes as the Office for National Statistics (ONS) prepares to release the July inflation figures this Wednesday, on 14 August. The Consumer Prices Index (CPI) measure of inflation has been neatly at the Bank of England’s target of 2% for the past two months, but analysts predict we could see an increase in the July reading.

The survey by RAW Capital Partners, a Guernsey-based investment management firm, polled 756 UK-based investors with investments worth more than £25,000, excluding the value of their residential property, savings and pensions. It asked them which factors, or events, they thought were the highest risk to their portfolio performance. 

Inflation ranked top, with 89% of respondents saying this presents a “high risk” or “moderate risk”. This was followed closely by a slow economic recovery in the UK (88%) and geopolitical conflicts, such as the wars in Ukraine and Gaza (87%). Lower on the list, 82% saw high interest rates as a risk to their investments while the US presidential election (81%) and climate change (79%) were also considered to pose notable risks to UK investors’ portfolios. 

“Globally, economies have been struggling with the impact of high inflation for some time, and the action that central banks like the Bank of England have taken to bring it down has made it extremely difficult for any meaningful economic growth,” comments Ben Nichols, interim managing director at RAW Capital Partners.

“This has clearly taken its toll on investors, with inflation remaining a major risk in their eyes, while a slower-than-hoped economic recovery in the UK is evidently another concern.”

What’s the outlook for UK inflation?

Inflation is widely expected to increase this year. In May, it fell from 2.3% to 2%, hitting the Bank of England’s 2% target for the first time in almost three years. Inflation then stayed at 2% in June. A survey of 54 economic forecasters by Bloomberg suggests that we could see inflation climb back up to 2.6% by the end of the year and July’s reading could show a rise compared to the previous month. 

Jonathan Moyes, head of investment research at Wealth Club, explains: “Part of the expected rise is for technical reasons. The reduction in the energy price cap last year is ‘falling out’ of the annual inflation calculation, meaning the negative effect of the lower price cap no longer drags down the average annual inflation figure for the previous 12 months.”

Stubbornly persistent services inflation could also have more of an impact on the overall inflation figure.

Steve Clayton, head of equity funds at Hargreaves Lansdown, notes: “If the July figure comes in no worse than 2.3%, we doubt investors will be too spooked by an edging up. Any signs of weakening service sector inflation will also be taken positively. 

“But if we see prices ticking up much above that 2.3% level, investors are likely to start scaling back their expectations of how far and how fast the Bank of England will be able to make further reductions in their base rate.”

Inflation has fallen significantly since it hit 11.1% in October 2022, the highest rate for 40 years. While no one is predicting a return to double-digit inflation in the near future, Ben Yearsley, investment consultant at Fairview Investing, says he’s aware of investors being worried about rising inflation.

“The public sector pay deals have the potential to escalate at exactly the wrong time. If other parts of the public sector follow suit, what happens then? Add in increased shipping costs and possibly more Russian gas issues and there could well be an uptick,” he tells MoneyWeek.

How can investors inflation-proof their portfolios?

The best way to inflation-proof a portfolio is to adopt a well-diversified portfolio and a long-term approach. This means a mix of assets like global equities, fixed income, property, infrastructure, private equity and commodities.

Gold is normally seen as a good hedge against inflation, and last month the yellow metal hit a new record high. Infrastructure can also help protect against inflation. 

Yearsley comments: “Nothing really works perfectly over the short term. Gold has done quite well this year. It obviously doesn't pay an income so there is an opportunity cost to holding it when you can get 4% or more on cash.

“Infrastructure is another area that works well over the long run, that actually looks cheap today as it's been in the doldrums a bit. Infrastructure funds typically own assets where the underlying cash flows have some inflation-linking.”

The investment consultant says he’d stick to infrastructure for inflation-proofing, and recommends First Sentier Responsible Listed Infrastructure as a broad fund, or more specialist trusts such as Downing Renewables and Infrastructure or International Public Partnerships.

Moyes likes Brookfield Infrastructure Partners Corporation: “Dual-listed in Canada and the US, the investment company is managed by Brookfield Asset Management, one of the world’s top infrastructure investors. The company owns large-scale assets that are critical to a well-functioning modern economy, such as gas pipelines, mobile phone towers, data centres and shipping containers.” The assets typically come with revenue streams linked to inflation. 

The share is held across Wealth Club portfolios. Moyes adds: “It has a dividend yield of around 4.4%, and targets dividend growth of 5-9% per annum. We believe in everything in moderation, [so it] does not currently constitute more than 2% of a Wealth Club Investment Portfolio.”

The annual rate of inflation came in at 2% in June. This marks no slowdown compared to May, when the Consumer Prices Index (CPI) hit the Bank of England’s target for the first time in almost three years.

The largest upward contribution came from restaurants and hotels, according to the Office for National Statistics (ONS), where prices rose by more than a year ago. 

Meanwhile, the largest downward contribution came from clothing and footwear, where prices fell this year after rising a year ago. 

An August rate cut from the Bank of England could now prove less likely. This comes after hawkish comments from the Bank of England’s chief economist earlier this month.

In a speech delivered on 10 July, Huw Pill warned about the persistence of UK inflation.

While he described inflation's return to 2% as “welcome news”, economic indicators like services inflation and wage growth remain higher than the Bank of England would like.

“Recent developments in these indicators have hinted towards some upside risk to my assessment of inflation persistence,” Pill added.

Karen Barrett, chief executive and founder of Unbiased, adds that “expectations that prices will rise again later this year” could encourage the Bank of England to tread carefully. 

We look at what the latest inflation data means for you. 

When will the Bank of England cut interest rates?

The Bank of England has been holding interest rates at a 16-year high of 5.25% for almost a year. The Monetary Policy Committee (MPC) will next meet on 1 August to set the base rate.

As recently as a month ago, many economists were expecting the MPC to cut the base rate at the August meeting. In a poll from Reuters, published on 12 June, 63 out of 65 economists voted for August rather than September as the most likely month for a first move.

However, expectations have shifted over the past month as experts focus on the stickiness of services inflation and wage growth. Pill’s comments on 10 July have added to this picture.

Services inflation came in at 5.7% in June, marking no change compared to May. Core inflation (which excludes volatile measures like energy, food, alcohol and tobacco) also remained the same at 3.5%.  

Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, describes an August rate cut as resting “on a knife edge”.

He says: “While [today’s CPI] figures provide further reassurance that the UK’s inflation crisis is in the rear-view mirror, uncomfortably high services inflation suggests that its damaging after-effects are still being felt.

“Sticky services inflation will cause considerable unease at the Bank of England because it suggests that underlying price pressures are frustratingly persistent and leaves the UK more vulnerable to the impact of future price shocks.”

Despite this, he adds that CPI’s return to target in recent months “should at the very least drive a more dovish vote split to signal that rate cuts are imminent.” 

Indeed, over the past few meetings, we have seen the MPC start to turn. In April’s meeting, one committee member voted for a rate cut. This increased to two committee members in May and June.

What do the latest inflation figures mean for you?

Prices are still rising, but at a far slower rate than they once were. At inflation’s peak, prices were rising by around 11% a year. Now, they are going up by 2%. This is good news for many households who have been struggling with the cost of living in recent years. 

Consumers should be starting to see the effects of this when carrying out their weekly shop or paying their energy bills. 

Yesterday, research company Kantar revealed that grocery prices are now rising at the slowest rate since September 2021. What’s more, the new energy price cap came into effect on 1 July, causing the average bill to tumble by 7%.

Crucially, wages are also growing at a faster rate than inflation. This means many households are starting to see the pound in their pocket go further. 

Despite this, the cost-of-living crisis is far from over. Mortgage rates and rental costs remain high, causing pain for many households. 

Although mortgage rates have started to come down gradually in recent weeks, they remain significantly higher than levels seen towards the end of the 2010s. 

The average two-year fixed-rate mortgage now costs 5.91%, while the average five-year rate is slightly lower at 5.49%. For comparison, the same rates sat at 2.44% and 2.74% respectively in December 2019, according to data from Moneyfacts.

What’s more, consumers could see their summer budgets stretched, if they are planning to make the most of the holiday season. 

“Price increases in summer spend areas such as package holidays (8.7%), holiday centres (10.9%), and cinemas, theatres and concerts (7.4%) are all in high single and even double digits,” says Matthew Chapman, associate partner at McKinsey & Company. 

He adds that these are “areas where consumers seem more inclined to splurge”, and notes that “persistent services inflation is creating upward pressure on the overall rate of inflation”. 

Is it time to fix your savings?

Although an August rate cut looks less likely than it once did, savers should take heed and review their savings pots sooner rather than later. Barring any major economic shocks, interest rates have now peaked. It’s not a question of if they are going to come down, but when. 

Some of the best savings deals have already been pulled in anticipation of base rate cuts later this year. While the best easy-access savings accounts are still offering rates north of 5%, these are likely to tumble once the Bank of England makes its first move.

The good news is that savers can lock in higher rates for longer by putting some money in a fixed-rate account. However, it is important to remember that you won’t be able to access the money for the duration of the fixed-rate period. 

As such, it’s always best to keep your emergency funds in an easy-access account while putting some longer-term savings in a one or two-year fixed-rate pot.

“This is a window of opportunity for savers, so now is the time to clamber in and grab a decent rate before it closes,” says Mark Hicks, head of active savings at Hargreaves Lansdown.

Grocery prices are rising at the slowest rate since September 2021, according to the latest data from research firm Kantar – a boost for shoppers struggling with the cost of living. 

Prices rose by 1.6% on an annual basis in the four weeks to 7 July. 

The figures come during a buoyant month for UK supermarkets, which saw an increase in footfall and sales. “Britons made 2% more trips to the supermarket this period than they did one year ago,” says Fraser McKevitt, head of retail and consumer insight at Kantar. 

Sales are up by 2.2%, partly driven by a boost from the men’s Euros, with families adding beer and matchday snacks to their baskets.

Some shoppers are also switching back to the brands that they know and love as prices start to come under control. “Sales of branded products increased by 3.6%, outpacing own-label items at 2.7%,” McKevitt adds.

Prices are still rising, but at a far slower rate than they once were. What’s more, wages are now rising at a faster rate than inflation, which means many households are starting to see the pound in their pocket go further.

We look at the latest trends before delving into what it means for the UK economy. Will interest rates come down this summer as inflation continues to slow? 

What are households spending on?

The increase in footfall and sales, combined with the return to branded products, suggests consumer confidence is starting to improve. However, a wet summer has changed the items shoppers are putting in their baskets. 

“Over the past three months, sales of cold and flu treatments jumped by 35%, while sun cream dipped by 10% compared with last year, when we were enjoying the warmest June on record,” says McKevitt. He adds that fake tan sales are up 16%. 

This is not the only time the rain has threatened to dampen sales in certain areas. Last month’s report from Kantar showed supermarket sales were up just 1% in the four weeks to June (versus 2.2% this month), as consumers gave the shops a swerve due to the rain. 

Supermarkets will be hoping for a spell of good weather going forwards, if the sunshine is enough to continue the Euros boost and get shoppers putting more beer and barbeque foods in their trolleys.

Which supermarkets are benefitting the most?

We recently looked at whether UK supermarket stocks are a good buy – and our conclusion was that it’s a competitive sector driven by a ruthless battle for market share. This is good news for the consumer, as it keeps prices competitive, but it can make for a volatile investment experience.

The latest Kantar data reveals Ocado was the fastest growing grocer again this month for the fifth time in a row. Sales are up 10.7% over the 12 weeks to 7 July. 

Despite this, the online retailer and grocery tech company has been a bad buy for investors in recent years. The share price is down more than 86% from its peak during the pandemic in 2020, and the company was recently relegated from the FTSE 100.  

Ocado’s half-year results were better than expected when released today, 16 July, giving the share price a boost. However, it is still down almost 50% year-to-date.

Dan Coatsworth, investment analyst at AJ Bell, says the company is “like a yo-yo” and that it “needs to make a habit of regularly producing [good] results like these if it is to properly win back the market’s favour”. 

What’s next for the economy and will interest rates fall? 

The continued slowdown in grocery prices could bode well for tomorrow’s inflation figures – the Consumer Prices Index will be published at 7am. 

Inflation hit the Bank of England’s 2% target in May, after falling from a peak of 11.1% in October 2022.

All eyes are now on the Monetary Policy Committee (MPC) and when it will cut interest rates. They have been held at a 16-year high of 5.25% for almost a year. 

The MPC is next due to meet on 1 August, but experts are starting to wonder whether a September cut is more likely. 

Although headline inflation has slowed significantly, core inflation, services inflation and wage growth are still higher than the Bank of England would like.

The UK has “won the race” in getting headline inflation back to target, says Sanjay Raja of Deutsche Bank. The annual rate of inflation hit the Bank of England’s (BoE’s) 2% price target in May for the first time since 2021. By contrast, US and Euro area inflation are running at 3.3% and 2.6% respectively. 

The return to target has been helped along by falling goods prices (down an average of 1.3% over the past year) thanks to cooler food-price inflation and falling household energy tariffs. Yet the “fly in the ointment” remains stubborn price rises in the services sector, where inflation is still running at 5.7% year-on-year as high wage costs bite (average UK pay rose 6% in the year to February-April, excluding bonuses). The bad news is that UK inflation is thus unlikely to stay at 2% for long and looks likely to average 2.5% in the second half of the year.

Interest rate cuts are coming

Cooler inflation should open the door to interest rate cuts, but not straight away. Last week the BoE’s monetary policy committee again voted to hold interest rates at 5.25%. Seven committee members opted to hold, with two supporting a cut. 

The minutes of the meeting marked “a significant change in tone” for the Bank, say Dearbail Jordan and Faisal Islam for the BBC. “While not a done deal”, Threadneedle Street has sent “a clear signal to the markets” that “a rate cut is now the most likely outcome at its next meeting” in August. It would thus join the European and Swiss Central Banks, which have already begun cutting rates. 

At 5.7%, annual services inflation is still running at about twice the level consistent with inflation remaining at the 2% target, says Chris Dorrell for City AM. Given that obstacle, investors were “pleasantly surprised” by the Bank’s “relatively dovish tone” at the meeting (easier money is usually good news for markets). Policymakers noted that a near 10% increase in the minimum wage this spring contributed to services inflation, but that future rises are unlikely to have such a big impact. 

Stretched homeowners will ask why the Bank is not already cutting borrowing costs. For one thing, slashing rates shortly before a general election would have been a bad look politically, not least because of Rishi Sunak’s attempt to claim credit for falling inflation, says David Smith in The Sunday Times. High services inflation also remains a genuine concern because “it is the closest thing we have to a measure of domestically generated inflation”. 

Still, the big picture is that rates are “coming down” – whether the first cut comes in August or September. Rejoice, “better times lie ahead” for the economy. Not that those improvements will come in time to help the government – whose idea was it to call an early election?

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UK inflation slowed to 2% in the 12 months to May, down from 2.3% in April. This is the lowest level in almost three years, according to data from the Office for National Statistics (ONS). Prices are still rising but at a significantly slower rate than they once were. Inflation peaked at 11.1% in October 2022. 

Economists will not be surprised by the reading. They had expected the headline inflation rate to fall back to 2%, according to a recent poll from Reuters. However, it’s unlikely to be enough to prompt the Bank of England to cut rates at its Monetary Policy Committee (MPC) meeting tomorrow. Most experts believe August is the most likely month for a first cut. 

We share our analysis on this morning's data. What’s next for the economy and when will the Bank of England cut interest rates? Plus, what does the latest inflation reading mean for consumers, savers and mortgage holders? 

Why has UK inflation slowed?

The largest downward contribution to the CPI rate came from food, the ONS reports. Food prices fell this year but rose a year ago, it adds. Meanwhile, the largest upward contribution came from motor fuels, where prices rose slightly this year after falling a year ago.

Inflation has been gradually slowing from its peak as the pandemic recedes further into the background, supply chains normalise, energy prices fall and higher interest rates take effect.

While the headline rate of inflation is back to 2%, core and services inflation remain elevated. Core inflation came in at 3.5% in the 12 months to May, down from 3.9% in April. Meanwhile, services inflation came in at 5.7%, down from 5.9%. 

Core CPI excludes volatile measures such as energy, food, alcohol and tobacco. It is a better measure of how embedded inflation is in the economy. Meanwhile, the Bank of England keeps a close eye on services inflation, as the UK is a service-oriented economy. 

“Hitting the 2% inflation milestone will be a major moment for the BoE after a long, drawn-out battle to bring rampant inflation down from the double-digit levels seen just over a year ago,” says Alice Haine, personal finance analyst at Bestinvest. 

However, “while the news will be comforting for households, it is unlikely to result in an immediate rate cut tomorrow,” she adds, pointing to the core and services inflation figures.

When will interest rates fall?

The Bank of England will announce its next interest rate decision tomorrow, 20 June. Most economists do not expect the MPC to cut rates at this meeting. 

While governor Andrew Bailey has previously indicated that things are “moving in the right direction”, April’s inflation reading (2.3%) surprised to the upside last month. As well as core and services inflation proving sticky, wage growth is still coming in fairly strong at 6% too. The Bank of England keeps a close eye on wages as they are a key driver of inflation. 

What’s more, with a general election fast approaching on 4 July, the Bank of England could be worried that a June rate cut would end up being politicised. Rishi Sunak has already claimed that a vote for the Conservatives is a vote for interest rate cuts. 

“We are the party who has committed to bringing down inflation, which is the necessary condition for bringing down interest rates,” he told The Times. 

As global inflationary pressures continue to cool, several central banks have started cutting interest rates in recent weeks. The European Central Bank (ECB) made its first interest rate cut in almost five years earlier this month, joining the likes of Sweden, Switzerland and Canada, who have also started to loosen their monetary policy.

Meanwhile, when it comes to the Bank of England, a little more patience is likely to be required. In a recent poll from Reuters, 63 out of 65 economists voted for August as the most likely month for a first cut to the base rate. The two economists who disagreed with the consensus pointed to September, with none of the respondents voting for June. 

This is a marked change from a few weeks ago. Before April’s inflation data was released, economists had been split between June and August. 

Is the cost-of-living crisis over?

“The return of inflation to the Bank of England’s 2% target is not the end of the cost-of-living crisis but it may mean we are through the worst,” says Tom Stevenson, investment director at Fidelity International. 

Nevertheless, in the leadup to the general election, the latest inflation reading is likely to be “highlighted by the government as evidence that the economy has stabilised, despite growth stagnating in April,” he adds.

The good news for workers is that real wages have been rising as inflation slows. This should mean they are seeing their money stretch further. They will also have benefitted from “two cuts to the headline rate of National Insurance this year”, Haine points out.

Despite this, interest rates remain high and many mortgage holders are in for higher costs once their fixed-rate period comes to an end, if it hasn’t ended already. Recent analysis revealed that hundreds of thousands of fixed-rate mortgages are set to expire before the general election. 

On top of this, the unemployment rate continues to pick up, climbing to 4.4% in the three months to April. This is the highest rate since September 2021. This could suggest higher interest rates are starting to have a negative impact on businesses. Any threat of layoffs would be worrying news for workers.

Haine points out that the general election could throw further uncertainty into the ring. “A new government has the potential to bring in a raft of changes with their own implications for people’s personal finances,” she says. 

Her advice to those with “lingering financial concerns” is that they “stick on the cautious path for now, reining in expenditure where possible, keeping emergency funds topped up and paying down expensive debts”. She also suggests “considering how to save and invest in a tax-efficient way”. 

See our ISA guide for information on how you can shield your cash savings and investments from the taxman. 

Is it time to fix your savings?

A lower rate of inflation is usually good news for savers. It means the purchasing power of their hard-earned cash is no longer being eroded at such a fast rate. If inflation had stuck around at its peak of 11.1%, it would only have taken around six years for the value of your savings to halve.

The bad news is that, once interest rates are cut, savings rates are likely to fall too. Some of the best deals are already being pulled from the market – which means you will need to act fast if you want to take advantage while they last.

For now, a huge number of providers are offering inflation-busting rates. What’s more, the best easy-access savings accounts are paying interest at a rate of 5% or more. If you want to lock these attractive rates in for longer and don’t need to access the money in the short term, you could consider fixing your savings. 

“The implications of any possible reductions to the base rate may mean some people will be keen to grab a deal quickly and review their existing accounts,” says James Hyde, spokesperson at Moneyfacts.

He adds: “For those willing to lock their cash away for a set period, there are still some one and two-year fixed bonds paying over 5% interest. Some easy-access accounts also pay above this threshold at present, though these rates are subject to change with very short notice.”

What does the latest inflation news mean for mortgage holders?

Mortgage holders are eagerly anticipating an interest rate cut from the Bank of England. Any news that brings them closer to this event will be gladly received. 

Mortgage rates skyrocketed in the aftermath of Liz Truss’s disastrous mini-Budget, and remain elevated and volatile to this day. While they have now come down from their peak last summer when they weren’t far off 7%, rates remain significantly higher than those seen towards the end of the 2010s. 

Those who were at the beginning of a five-year fix when rates started going up won’t yet have rolled onto higher monthly costs. However, trade association UK Finance reports that around 1.6 million fixed-rate mortgages are due to expire at some point in 2024. If your mortgage is coming up for renewal soon, you could well be feeling nervous. 

As inflation continues to slow, interest rate cuts should be just around the corner. However, the base rate is unlikely to be cut dramatically at first. This means mortgage costs could remain elevated for some time. 

We share our tips on how to cope with higher mortgage costs. 

As politicians hit the campaign trail in the lead-up to a 4 July general election, the Conservatives are wearing the improving economy as their battle standard. 

But as the pandemic recedes further into the background and higher interest rates start to have the desired effect, to what extent is this really down to them?

As he stood at a soggy podium in front of Number 10 last week, battling with the sound of a D:Ream track as it blared from a nearby speaker, Rishi Sunak’s focus was firmly on the inflation and growth picture.

“Our economy is now growing faster than anyone predicted – outpacing Germany, France and the United States – and this morning, it was confirmed that inflation is back to normal,” he said.

The timing of the election announcement on inflation day? No coincidence, it would seem.

But how much of an impact does fiscal policy have on economic data? And can Sunak and Hunt really take all the credit? We take a closer look.

The political importance of the economy

Elections are won and lost on the basis of the economy. This is something we have seen time and again throughout history. 

There have been 27 general elections since 1922, Professor Steve Fisher points out in a recent working paper from the University of Oxford. Fourteen of these were preceded by economic crises, while 13 were not. 

In the elections following periods of economic stability, the incumbent government was re-elected 10 times. In the periods following crises, it lost nine times. Clearly, the economy is a key battleground.

This tallies up with what we’re seeing from YouGov. The research company's weekly tracker keeps tabs on the most important issues facing the country and, as of 27 May, the economy is coming in top (51%), closely followed by health (45%). 

The Conservatives understand this and, as a result, they are at pains to paint the economic narrative in a favourable light. 

This isn’t a new tactic – at the start of 2023, Sunak promised to halve inflation by the end of the year. And now that inflation is within touching distance of the 2% target, he is calling a second victory. 

Of course, the cost-of-living crisis has been one of the biggest challenges in a generation. Framing yourself as the slayer of this particular dragon has clear political benefits. 

But as voters head to the ballot box, it is important to look at the key factors that are really driving slower inflation. Do we have the government or the Bank of England to thank? Or, is it more to do with other global factors, such as falling energy prices and more normal supply chains? 

Why is inflation slowing down?

Inflation has been gradually slowing from its peak of 11.1% in October 2022, and April’s figure came in at 2.3%. That’s the lowest level in almost three years – albeit core and services inflation are proving stickier. 

We asked the experts at Capital Economics what’s driving this – and their answer had little to do with Whitehall at all. 

“A big part of the drop in CPI inflation since the peak of 11.1% in October 2022 has occurred in areas where prices are mostly determined by events overseas, such as utility and petrol prices,” said Ruth Gregory, deputy chief UK economist. 

Just last week, the Office for National Statistics (ONS) reported that the price of electricity, gas and other fuels fell by 27.1% in the year to April 2024. That’s the largest fall on record. 

Furthermore, energy prices should fall further going forward, with the Ofgem price cap being cut by 7% from 1 July. This follows a 12.3% cut from 1 April, resulting in lower bills for many households. 

But just how much does this have to do with the government? 

Of course, the government took significant steps to control energy prices between 1 October 2022 and 30 June 2023, when it introduced the Energy Price Guarantee. This protected households from the worst effects of the energy crisis and prevented the headline inflation figure from soaring even higher. 

However, the Energy Price Guarantee ended on 1 July 2023, when it fell below the Ofgem price cap. The main reason households are paying less for their energy bills today is because the wholesale oil, gas and electricity prices have fallen. 

With this in mind, inflation falling back to 2.3% has less to do with party politics than factors on the global stage.

“If there is any credit to be doled out for the fall in inflation explained by domestic events, it should go to the Bank of England which has helped to crimp domestic inflation by raising interest rates,” in Gregory’s view.

Indeed, the Bank of England raised interest rates fourteen times between December 2021 and August 2023, bringing them to their current level of 5.25%. It has now been holding the base rate at its sixteen-year high for over nine months. 

Has the government’s approach to taxation helped slow inflation?

Of course, there are some levers that the government can use too. For example, raising taxes and cutting spending can help control the rate of inflation. But to what extent has it been using the tools at its disposal?

On the one hand, Sunak (then chancellor) froze the personal tax thresholds in March 2021 in an attempt to balance the state’s books. This followed an intense period of government spending during the Covid pandemic. The tax thresholds remain frozen to this day. 

However, as Paul Johnson, director of the Institute for Fiscal Studies (IFS) told the BBC last year, higher income tax was not implemented in an attempt to slow inflation. Rather, it was put in place “for public finance reasons”. 

One clear moment when Hunt did step in was in October 2022 in the aftermath of the disastrous mini-Budget. As the UK’s newly-appointed chancellor, he took the decision to reverse almost all of Liz Truss’s inflationary tax cuts. 

The International Monetary Fund (IMF) welcomed this decision, saying that it would “better align fiscal and monetary policy in the fight against inflation”. However, this isn’t much of a victory for the Conservatives in light of the fact that the mini-Budget chaos was unleashed from within its own party.

More recently, though, Hunt has offered UK workers a string of more moderate tax cuts. In his 2023 Autumn Statement, he cut National Insurance contributions from 12% to 10%, before slashing them again to 8% in his Spring Budget this year. 

If they win the next election, the Conservatives have made no secret of their ambition to scrap National Insurance entirely. 

Hunt has said that the latest cuts are only possible “because of the progress we have made bringing down inflation”. However, Keir Starmer has said that any plans to scrap National Insurance entirely would amount to a “£46 billion unfunded tax cut”. 

Starmer has also hinted at similarities between this potential tax reform and the disastrous cuts made by Truss.

For now, the only thing we know for sure is that tax will be a key talking point on the campaign trail as we race towards the 4 July election. 

Both sides will want to appeal to voters’ purse strings, where they can. But they will also need to walk a careful line between winning voters around and maintaining economic stability.

The UK inflation rate in shops has gone ‘back to normal’, the British Retail Consortium (BRC) has said, thanks to discounting on furniture and electricals.

The overall annual rate of price hikes in UK stores, including high street shops and supermarkets, fell to 0.6% in May, the retailer trade body’s monthly shop price index found. This was down slightly on the 0.8% it recorded in April and is the slowest rate of growth the BRC has recorded since November 2021.

Price cuts on audio-visual equipment, such as TVs, meant the rate of non-food price cuts continued to go up. Annual deflation now sits at 0.8%, up from 0.6% the previous month. However, food prices continued to rise at a relatively fast rate.

The news comes just days after it was announced headline inflation - as measured by the Consumer Prices Index (CPI) - had fallen to 2.3%. Despite now being close to the Bank of England’s 2% target, sticky services inflation may have delayed any base rate cuts, experts have warned.

BRC: ‘food inflation rate remains high, but has stabilised’

The BRC’s latest analysis of shop price inflation, which it runs in conjunction with data analysis firm NielsenIQ, measured shelf prices in stores across the country from 1 to 7 May. It then compared them month-on-month, as well as with the same week in May 2023.

Food prices kept the overall inflation figure out of negative territory, with the annual rate of hikes in the category hitting 3.2%. This figure was a slowdown on the 3.4% recorded in April, meaning food inflation has now been coming down for 13-consecutive months, and is at its lowest ebb since February 2022.

However, part of the reason why the figure has fallen so much is down to how high food inflation was in May 2023. This time last year, the inflation rate for the category was a whopping 15.4%. This month’s figure should be seen as being in addition to that rapid rate of growth.

Within the food statistic, fresh food slowed to an annual inflation rate of 2% - the lowest level seen since November 2021. Shelf prices for ambient food items - products you would find away from refrigerator aisles in supermarkets, like pasta and crisps - continued to grow quickly, jumping 4.8% compared to last year. This figure was 0.1 percentage points lower than what the BRC recorded last month.

Explaining the latest findings, BRC chief executive Helen Dickinson said: “Shop price inflation has returned to normal levels. Ambient food inflation remained stickier, especially for sugary products which continued to feel the effects of high global sugar prices.

“In non-food, retailers cut furniture prices in an attempt to revive subdued consumer demand for big-ticket items, and football fans have been able to grab some bargains on TVs and other audio-visual equipment ahead of this summer’s Euros.”

On top of the improved figures, NielsenIQ said it had seen “some improvement” in consumer sentiment. But it added that next month’s inflation data could show even greater falls as relentless wet weather had “dampened retail sales” and forced an increase in store promotional activity.

BRC calls for retail policies in general election 2024 manifestos

Alongside the latest inflation data, the BRC also said it wanted to see more support announced for the retail sector during the general election campaign. The UK public will go to the polls on 4 July.

The trade body represents thousands of retailers, including most of the country's largest supermarkets. It's CEO, Helen Dickinson, said: “Retailers are playing a key part in bringing inflation down, but future government policy must support this too. Retail plays a key role in every part of the country, from the smallest village to the largest city, employing millions of people, and serving millions more.

“As the cost burden of new policies rises - from business rates to packaging taxes – this affects not just the businesses, but their customers too. With an election in a matter of weeks, it is vital that parties detail their support for customers and retailers in their upcoming manifestos.”

We have rounded up all the commitments that have been made so far by the Conservatives and Labour Party.