Open Editor's Digest for free
Rula Khalaf, editor of the Financial Times, picks her favorite stories in this weekly newsletter.
The UK inflation report on Wednesday came as a shock to economists, politicians and consumers who had expected the rate of price increases to continue to decline.
December's inflation rate was 4 percent, 10 basis points higher than the previous month, 20 basis points above expectations and double the Bank of England's inflation target. This jump was largely caused by increases in alcohol and tobacco prices.
This news dampened hopes that the Bank of England would cut interest rates in the near future. The market's implied probability of a first rate cut in May fell to 55 percent from 80 percent.
Financial Times Money explores what a reversal in inflation could mean for investments, mortgages and pensions.
Will mortgage rates rise again?
In recent weeks, mortgage providers such as Barclays, Santander, HSBC and Halifax have cut interest rates in the wake of positive data on the UK economy, an increase in home sales and expectations that interest rates have peaked.
While experts say that in the longer term mortgages are still likely to fall, Wednesday's inflation news will provide pause for providers offering increasingly generous interest rates.
“We have received a lot of good news in recent months, supported by lower inflation,” said David Hollingsworth, associate director at brokerage L&C Mortgages. “this [reading] It will likely push the timeline for base rate cuts even further, and confirm that it is not true that fixed mortgage rates will continue to fall, and fall, and fall.
In response to Wednesday's inflation announcement, so-called swap rates – which influence lenders' pricing of their fixed-rate mortgages – rose by more than 20 basis points for two-year and five-year deals.
As of Friday, two-year and five-year fixed mortgage rates averaged 5.61 percent and 5.24 percent, respectively, according to finance website Moneyfacts, unchanged from the previous day.
Ray Bolger, an analyst at brokerage John Charcol, said that since the inflation rate “will obviously have a negative impact”, mortgage seekers should take good deals while they are at the table.
“For anyone buying and securing a mortgage: Don't expect the best rates to go any lower than they are now,” he said. “There's no harm in talking to a broker and locking in a price knowing that if prices fall further, you can try switching.”
Will inflation eat away at my savings and investments?
Cash was attractive in 2023 due to rising interest rates, but savings rates are starting to fall in anticipation of Bank of England cuts.
Although Wednesday's inflation reading bucks this trend, experts do not expect cash rates to reverse their decline.
“I think banks and building societies will be out of business for some time,” said Daniel Coatsworth, investment analyst at AJ Bell. “From the initial shock you might expect the best [cash] But I don't think interest rates are sufficient to justify a radical shift.
The news may also be unwelcome for investors concerned about their stock portfolios. The FTSE 100 index closed 1.48 per cent lower on Wednesday, as questions mounted about the pace of interest rate cuts.
“We've definitely seen a reaction, especially among highly leveraged companies,” said Sarah Coles, head of personal finance at Hargreaves Lansdowne. “But after the initial reaction we expect that to level off… Markets hate surprises and that's why we've seen a bit of a decline, but we don't expect a dramatic reaction on an ongoing basis.
What does higher inflation mean for my pension?
Although stock market volatility caused by inflation readings will affect the value of pensions, experts warned that Wednesday's rate should not be a cause for panic.
“Pensions are long-term investments if you're young, but even if you're down, you could probably invest them for another 10, 20 or 30 years,” said James Norton, a senior investment strategist at Vanguard UK. “So we would urge people not to read too much into one month's numbers.”
However, if inflation continues to rise, the purchasing power of pensions will decline. Clashes in the main Red Sea shipping lane could also cause product shortages and higher prices.
“When the stock market isn't growing smoothly at the same time inflation is rising, you see people's retirement situation start to deteriorate,” Coles said.
For retirees with certain types of defined benefit plans, inflation rates can affect the monthly payment.
While many schemes increase in line with prices, some are capped at between 3 to 6 per cent, meaning that if inflation rises pensioners' pockets will take a hit.
However, schemes can issue discretionary payments to help their members weather harsh economic circumstances.
“A lot of trustees were considering whether to give discretionary increases,” said David Brooks, head of policy at pensions management and consultancy Broadstone. “But even though inflation is rising, it is trending downward, which could end those talks.”
