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Inflation Holds at 8.7% Prompting Near-Certain Interest Rate Hike

The price rise rate continues to stubbornly hover at 8.7%, in spite of economists’ predictions of a slight decrease, which could have provided some relief to the tremulous housing market. Today’s unsettling figures from the Office for National Statistics (ONS) issue a stark warning to households with disconcerting news on consumer prices. This suggests that fixed mortgage rates could still escalate, adding more hurdles to remortgaging or home buying.

This morning, the ONS confirmed that the price rise rate remained at 8.7% over the year up to May, consistent with April’s rate, contradicting anticipated drops. Inflation and price metrics, such as consumer price inflation, producer price inflation, and the House Price Index, form the basis of the Bank of England’s interest rate decisions.

Economists had anticipated a minor decrease to 8.4%, which would have assuaged the mortgage anxieties of many, particularly as the Bank of England (BoE) is slated to decide on interest rate hikes tomorrow.

Despite falling fuel prices, rises in air travel, recreational and cultural goods and services, and second-hand cars have offset the balance. Core inflation, which excludes food, energy, alcohol and tobacco, saw an increase to 7.1% from 6.8%. Meanwhile, prices for food and non-alcoholic beverages continued to recede from their March peak of 19.2% to 18.4%.

Inflation was set to ease as the annual measure of price growth no longer factored in the energy price surge. However, inflation started climbing in late 2021 due to COVID-related lockdowns and subsequent worker shortages, resulting in unmet goods demand.

In response to the inflation data, Tom Bill, head of UK residential research at Knight Frank, stated, “Over the last two months, inflation has supplanted the mini-Budget as the biggest hurdle facing the UK housing market. The prospect of increasing interest rates has ramped up monthly mortgage payments, which will contribute to trading activity slowdown and house price stagnation this year. However, wage growth, driving core inflation, prevents us from expecting a steep double-digit drop in house prices this year. Record housing equity levels, longer mortgage terms availability, and the recent popularity of fixed-rate products should also avert a collective precipice moment for the housing market.”

Andrew Montlake, managing director of Coreco, a UK-wide mortgage broker, added, “This latest inflation data is set to dismay a great many, resulting in a fresh round of rate hikes exacerbating the cost of living crisis. A further Bank of England base rate rise seems inevitable, and there is a genuine chance they could hastily raise it by another 0.5% to 5%. The Bank needs to reconsider its strategy against inflation, which has become endemic, instead of repeatedly using the same ineffective tool. They should contemplate alternative approaches before causing substantial damage to the economy and people’s livelihoods.”