Inflation has risen to 3.6% in June in what is being described as a 'hammer blow' for homeowners and borrowers.
Some experts fear the increase in the Consumer Prices Index (CPI) from 3.4% in May might impact the predicted interest rate cut in August.
But there are also concerns it will leave consumers more financially vulnerable and this may impact affordability when applying for a mortgage.
Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, explained the jump in inflation was caused by an increase in transport prices – this included sharp hikes in air and rail fares and rising fuel prices. But food prices also increased.
She added: “Mortgaged homeowners and first-time buyers may be feeling disheartened by the latest inflation reading, as it could have an impact on their affordability position.
“Buying a home has already become more expensive for movers after stamp duty thresholds – the point at which people start paying the property purchase tax – reverted to their former lower level at the start of April.
“This delivered the heaviest blow to first-time buyers, who don’t have the equity advantage existing homeowners can enjoy of being able to use the proceeds from a previous sale to offset the cost.”
Will higher inflation impact August’s interest rate decision?
The Bank of England (BoE) was expected to cut interest rates when it next meets in August but rising inflation will have put a question mark over this.
This is because the BoE’s target for inflation is 2% and with the figure running further away from this benchmark, there will be more of an incentive to keep interest rates higher – a position which helps curb inflation.
Alice Haine said, however, inflation was just one element the BoE looked at when setting rates so today’s figure might not impact the decision in August.
“While those banking on another interest rate cut soon to ease borrowing costs further may be worried about the latest inflation jump, the central bank analyses several data points when it makes its decision,” she said.
“The shrinking economy, weak retail sales and a shifting employment landscape in the face of higher National Insurance costs are some of the factors fuelling speculation of another reduction in August.”
But Ranald Mitchell, director at Charwin Mortgages, told Newspage agency; “Inflation rising to 3.6% is a hammer blow for households and a warning shot for the economy. It shatters hopes of imminent rate cuts, leaves mortgage borrowers exposed, and offers little relief to savers still losing out in real terms.”
Meanwhile, David Hollingworth, associate director at L&C Mortgages said, he thought the Bank might ‘look through’ today’s figures and reduce rates in August. But even if they didn’t, borrowers have already been benefiting from reductions to fixed-rate mortgages.
“Many economists will suggest that inflation should still ease over the course of this year and that weak economic growth and a potentially looser labour market leaves the path open to rates continuing the downward trajectory,” he said.
“Mortgage rates have been reflecting the market’s confidence in more cuts to come, as lenders have been quick to take advantage and trim back fixed rates. Lenders have been locked in an attritional rate battle that has seen frequent albeit small reductions made to fixed rate mortgage pricing.
“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.”
