Steve Clayton, head of equity funds, Hargreaves Lansdown: “We’ve already seen an interest rate cut in the UK, hints of one ahead in the States and stock market gyrations worldwide so far this month. To say that markets will be paying close attention to these upcoming numbers is likely understating things. In recent months, inflation, as measured by the Consumer Price Index, has come rattling back to sit at precisely the Bank of England’s target rate of 2%. But that looks unlikely to last, because much of the fall so far has been due to some big increases in early 2023 dropping out of the calculations as 2024 draws on.
A survey of 54 economic forecasters by Bloomberg suggests that we could see the headline figure climb back up to 2.6% by year end, before fading back to the target level in 2026. The July figure, about to be reported, could be the month where inflation starts to edge higher, because the pace of declines in utility prices is much weaker than a year ago. That could let stubbornly persistent services inflation make more impact on the overall number.
Markets know all this, and if the 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.”
The impact on savings and mortgages
Sarah Coles head of personal finance, Hargreaves Lansdown: “The expected rise in inflation is unlikely to frighten the horses, so it shouldn’t have an impact on the Bank of England’s rate-setters just yet.
The Bank of England has issued plenty of warnings that a rise in inflation is on the way. It largely comes down to energy prices. Every July, the energy price cap changes. This July it fell, but last July it fell further. The mathematical impact of replacing a bigger fall last year with a smaller fall this year means inflation will rise – even when prices are falling.
The Bank has already said it’s not worried about this. It’s less focused on energy price movements, and more interested in secondary effects. If core inflation, wage inflation and services inflation are reasonably under control, we can still expect another cut this year.
The market’s expectations are baked into savings and mortgage rates, so they’ll only shift significantly if we get a notable surprise.”
What it means for annuities
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown: “Inflation is expected to tick up, but not massively - it’s still way lower than it has been in recent years, and this is offering some much needed breathing space for pensioners who have had their budgets sorely stretched. Lower inflation is also good news for the new Labour government. Inflation is one factor used in the state pension triple lock formula and has contributed to some blockbusting increases in recent years. This year the figure used is likely to be wage growth, delivering a much lower increase to state pension that will still beat inflation
Even though inflation has fallen back massively it remains an important factor in people’s retirement planning. You could be retired for twenty years or more and you need to do what you can to preserve its purchasing power.
If you are in the market for an annuity, level annuities offer higher starting incomes than their inflation linked counterparts. However, a product linked to prices will grow over time whereas a level one won’t. The latest data from HL’s annuity search engine shows a 65-year-old with a £100,000 pension can get up to £7,215 per year from a level single life annuity with a five-year guarantee. One linked to RPI on the other hand offers up to £4,541 as a starting income.
It’s a difference that may put many people off, but you need to consider the fact that inflation can move massively during the course of your retirement, and you may catch up in terms of income faster than you thought. Should high inflation return, the purchasing power of the level annuity income that once seemed so attractive could be severely stretched.
Alternatively, if you don’t want to go down the inflation-linked route you can look at annuitising your pension in slices over time. This enables you to secure higher incomes while you age while allowing the rest of your pension to remain invested and grow.”
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