Inflation: What is core inflation UK? Five key points on how high inflation could make things worse

A further rise in some people’s mortgage rates on Thursday looks inescapable, according to experts, as inflation remains stubbornly high.

Today's news that UK inflation has remained stable may sound, at first read, as good news. At least it's not going up.

But that silver lining, if it exists at all, is attached to a very dark cloud. We have all likely been experiencing the impact of inflation already, on everything from energy bills to our food shop.

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When it comes to mortgages, for example, the Bank of England's Monetary Policy Committee, which meets on Thursday, will have to decide what they are going to do with interest rates.

A woman holding a shopping basket, as the inflation rate has remained stubbornly high in the UK. Picture: Jon Super/PA WireA woman holding a shopping basket, as the inflation rate has remained stubbornly high in the UK. Picture: Jon Super/PA Wire
A woman holding a shopping basket, as the inflation rate has remained stubbornly high in the UK. Picture: Jon Super/PA Wire

It would be foolish to bet against a rise in interest rates .The Bank of England is expected to raise the base rate by 0.25 percentage points on Thursday, taking it to 4.75 per cent, although some commentators have suggested there could be a more aggressive increase of 0.5 percentage points.

The extent of the rise, and what – if any – guidance the central bankers offer about what happens next will likely be a matter of fierce debate in the Bank's Threadneedle Street HQ. Households across the country will be justified in watching on with concern.

However, things may also get worse elsewhere before they get better – and not just involving mortgage rates.

Here's why:

How does high inflation affect me?

- Expectations were that inflation would recede – to 8.4 per cent, rather than the 8.7 per cent announced today. That news has spooked the markets this morning, and worried observers because it suggests that inflation is becoming ingrained in the economy;

- We are all feeling this – this is an inflationary crisis that's hitting households squarely in the wallet, because it's the staples of life which are surging in price. Food and (non-alcoholic) drinks are running at 18.4 per cent up, the biggest increase in the Office of National Statistics survey. But those who earn the least are feeling this hardest, because we all have to eat. Our weekly shop is not something that can be deferred;

- There's evidence we are seeing an inflationary spiral. This, in short, means higher prices lead to higher wage demands, which companies yield to – before hiking prices to pay for them. Rinse, and repeat, and it's hard to slow the loop down;

- Thus, there is now deep concern about what the Bank of England will need to do to control inflation. The only lever it can pull is on interest rates, which in normal times would slow down spending and take the inflationary heat out of the economy. And, indeed, the City of London sees interest rates going up from the current level of 4.5 per cent, for sure – the debate is about where interest rates will end up. A consensus, this morning, appears to be around 6 per cent – but some are suggesting an even bigger rise is needed.

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- But, given inflation today is around staple items like food – not luxuries – there's another concern. What if the Bank of England's only weapon against inflation – making debt more expensive – doesn't work? After all, higher prices will not put us off needing to eat. We might end up in a recession, with all the harm that would cause businesses and over-stretched households, but with inflation remaining stubbornly above target. And that would see households paying for a policy that wasn't having any impact. It would become a huge political problem.

What are experts predicting will happen with inflation?

No-one knows exactly how quickly inflation will go down from here – but there are no shortage of forecasts.

Kevin Brown, savings specialist at Scottish Friendly, has said: “Inflation has failed to move, but most worrying for households is the persistence of core inflation, rising to 7.1 per cent.

"This is a huge problem the Monetary Policy Committee will be focusing on dealing with through more rate hikes tomorrow. Stubborn core inflation suggests that high price rises are now bedded into the economy.

"This is compounded by the bigger-than-expected wage increases now coming through for workers. In short, rates will have to continue to rise if price increases are to slow meaningfully.

“This isn’t good news for households. Although they may be feeling better with rising pay packets, the risk to the economy is even more heightened by persistent inflation. Ultimately this could lead to a much more painful economic outcome.

“While mortgage pressure is the big issue, interest on savings is still well behind in inflationary terms too, which won’t encourage people to hold money back for a rainy day. Rates have a long way to go before even the top rate savings accounts begin to look attractive again.”

Rob Morgan, chief investment analyst at financial security body Charles Stanley, said of the impact on households: “Eradicating inflation will take more time and persistence from the Bank of England, which may mean households and investors getting used to structurally higher interest rates. The pressure on households continue to intensify with the month-on-month CPI figure of 0.7 per cent a painful reminder that prices continue to climb and the cost of living challenges are far from abating.

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“Notably this includes food prices. While CPI food inflation has eased from 19.0 in April to 18.3 in May, the month-on-month reading is 0.9 per cent. Prices are still marching upwards, just at a slightly slower pace. Overall, it’s a miserable situation for many households struggling to buy the essentials and make ends meet.

“With the Bank of England set to increase rates again, the difficulties for mortgage holders, and the housing market more broadly, look set to continue. So far, many households with fixed or discounted mortgage rates have been insulated, but more will be affected as time goes on and this will have greater knock-on consequences for consumer spending as the months go by.

“For savers, the increase in interest rates has been a welcome tonic compared with the dreary returns of much of the past decade. However, even the most competitive accounts pay significantly less than headline inflation meaning that the spending power of cash is stuck in reverse gear.”



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