The Consumer Prices Index (CPI) measures how much prices have gone up over the past year and the figures for August revealed inflation had a dipped, largely due to food prices falling.
It had been predicted the latest figures would show inflation had risen, mainly because of a rise in fuel prices.
The surprise fall in the price goods and services over the last 12 months may also have an impact on the Bank of England’s decision makers – the monetary policy committee (MPC) – which is meeting tomorrow to make a decision on what to do with interest rates.
Up until today’s inflation announcement it had been expected they would impose a 0.25% rise to the base rate. This would increase interest rates from 5.25% to 5.5%.
But Danni Hewson, head of financial analysis at AJ Bell, said what had seemed like a sure thing was now cast into doubt.
“Moments after the shock inflation number was released, the market expectation of a Bank of England rate rise began to plummet,” she said.
“Within half an hour what had been a pretty nailed-on 80% expectation of another quarter percentage point hike fell to a 50/50 chance that MPC members would vote to press pause on this rate hiking cycle, at least for now.”
The Bank of England has been increasing interest rates in an attempt to combat rising inflation. Although the slight fall in August is positive – the UK still remains in the grips of a cost-of-living crisis.
Hewson said: “Although inflation is falling, that doesn’t mean prices are coming down, and if the Bank of England has grounds to at least skip this rate hike that’s because cracks are beginning to form.
“This winter will still be incredibly tough for millions of households and if it’s a long, cold winter, what had been difficult choices last year may yet become impossible.”
What does this mean for your mortgage rate?
Many lenders have been cutting their mortgage prices recently, with some offering rates now below 5%. This has led to suggestions borrowers could be benefiting from a ‘rate war’.
Meanwhile, Andrew Bailey, the governor of the BoE, made comments earlier this month suggesting the base rate could have hit its peak.
But mortgage rates are still much higher than they were two years ago, meaning people on a tracker deal or those who have recently remortgaged to a fixed rate will be facing higher monthly repayments.
It would make a pause on interest rate hikes a great relief to many.
Nicholas Mendes, mortgage technical manager at John Charcol mortgage broker, said: “Swap rates have been falling for a few days following Andrew Bailey’s comments stating we are near the top of the rate rise cycle.
“Despite the rise not being a full gone conclusion as it was in previous months, markets had increasingly pre-empted a further rate rise tomorrow when the MPC meet of 0.25%.”
He added: “It will be interesting to see how markets react following todays unexpected inflation announcement and whether we see a rate rise tomorrow.
“Any increase in base rate won’t have an impact on the current trend in lenders repricing their fixed rates downwards as a rate rise had already been factored into lenders’ pricing.
“Markets though will be paying close attention to the governor’s notes following the announcement to assess whether we are indeed at the peak and if we should take the governor comments with a pinch of salt.”
