Hard-pressed homeowners have been given hope that mortgage rate rises could start to ease as as inflation after inflation eased back by more than expected last month.
The Office for National Statistics (ONS) said the Consumer Prices Index (CPI) fell to 7.9% last month, down from 8.7% in May and its lowest rate since March 2022, as food price inflation eased and fuel prices dropped sharply year-on-year.
Most economists had expected the figure to fall to 8.2% in June.
Financial markets trimmed their bets on the peak in interest rates to between 5.75% and 6% by the end of the year, having previously forecast 6.25% by next March.
UK stock markets yesterday enjoyed a rally after the inflation figures offered hope for the squeezed mortgage market.
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London’s FTSE 100 jumped by more than 2% during the day, while the more UK-focused FTSE 250 surged by more than 3.7%.
It gives a glimmer of hope for under-pressure mortgage borrowers, who have seen rates on fixed deals soar to 15-year highs in recent months.
According to Moneyfactscompare.co.uk, the average two-year fixed-rate homeowner mortgage rate on the market is 6.81%, up from 6.78% on Tuesday.
The Bank of England is still expected to raise interest rates - currently at 5% - at its next meeting on August 3 as it battles to bring inflation back to its 2% goal.
Experts said the bigger-than-expected fall in inflation could see the Bank’s policymakers opt for a smaller increase of 0.25 percentage points rather than another 0.5% rise.
But CPI is still a long way from Prime Minister Rishi Sunak’s target to halve inflation to 5.3% by the year end, with inflation having proved more stubborn than expected in recent months.
The ONS said falling fuel prices was the biggest driver behind the drop, down by a record 22.7% in June, while food price inflation pared back to 17.3% from 18.7% in May, though it is still painfully high.
Average petrol and diesel prices were 143p and 145.7p a litre respectively last month, compared with 184p and 192.4p a year earlier, according
In further encouraging news, food inflation also slowed in June as price rises for everyday staples such as cheese, bread and pasta eased back.
Official figures showed that the annual rate of inflation for the month slowed to 17.3% from 18.7% in May, but was still painfully high for shoppers.
It represents the third month in a row where food inflation has reduced as many supermarkets kept prices steady or launched price cuts as they were able to pass on waning wholesale costs.
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Helen Dickinson, chief executive of the British Retail Consortium, said: “Prices for cheese, fruit and fish all dropped as lower commodity costs and cheaper energy prices filtered through to customers.”
Bosses at supermarket chains including Tesco and Sainsbury’s have told their shoppers that peak inflation has passed in a potentially positive moment for customers and the economy.
However, there are still certain products, such as coffee, chocolate and margarine, which saw the rate of inflation accelerate last month.
Chancellor Jeremy Hunt said: “We aren’t complacent and know that high prices are still a huge worry for families and businesses.”
He stressed the need to “stick to the plan” to bring inflation under control.
Asked if the decline in inflation means the Bank should ease up on interest rate hikes, Mr Hunt said: “What we have seen is the Bank has taken very difficult decisions and the Government has taken very difficult decisions in the autumn statement to make sure that we really do start to bring down inflation.
“We are seeing the first fruits of that but there’s a long way to go and we need to remember that families are still feeling a lot of pressure.”
In another encouraging sign, so-called core inflation data was also better than feared, falling back to 6.9% from a 30-year high of 7.1% in May.
Core CPI - which excludes the price of energy, food, alcohol and tobacco - is often more in focus for the Bank’s Monetary Policy Committee (MPC) members when they set interest rates.
Economist James Smith at ING said it will be a “close call” whether the Bank votes for a quarter or half percentage point rise in August, with record wage growth being watched intently.
He said: “Is this enough to convince the Bank of England to opt for a 25 basis point rate hike in August? We think it probably will - but it’s going to be a close call.
“The Bank will also be looking at the recent wage data, which was stronger than expected but came alongside figures showing a renewed cooling in the jobs market and improvements in worker supply.”
The latest figures also showed that the CPI measure of inflation including housing costs (CPIH) fell to 7.3% from 7.9% in May, while the Retail Prices Index slowed to 10.7% from 11.3%.
ONS chief economist Grant Fitzner said: “Inflation slowed substantially to its lowest annual rate since March 2022, driven by price drops for motor fuels. Meanwhile, core inflation also fell back after hitting a 30-year high in May.
“Food price inflation eased slightly this month, although it remains at very high levels.
“Although costs facing manufacturers remain elevated, especially for construction materials and food items, the pace of growth has fallen across the last year, with the overall cost of raw materials falling for the first time since late 2020.”
The steep fall in inflation means that while prices are still rising, they are not increasing at such a rapid pace.
It comes after inflation proved stubborn in recent months, failing to come down as sharply as hoped.
June’s figures could see the Bank of England opt for a smaller increase in interest rates at its next meeting in August after June’s shock half a percentage point rise to 5%, according to experts.
Jake Finney, an economist at PwC, said falling energy prices and food inflation finally turning the corner “should see inflation get closer to 5% by the end of this year”.
He added: “Better-than-expected CPI figures could shift the dial to a 25 basis points rise to the Bank of England base rate in August, rather than 50 basis points.
“If today’s progress on services inflation continues this could provide the Bank with the breathing room needed to hike rates to a lesser extent than markets are currently expecting.”
But as much as £113 billion could have been wiped off the value of the nation’s savings over the past year in real terms, analysis suggests.
The analysis by investment platform AJ Bell was released after Office for National Statistics (ONS) said the Consumer Prices Index (CPI) eased to 7.9% last month, down from 8.7% in May and its lowest rate since March 2022.
Laura Suter, head of personal finance at AJ Bell, said: “Even though inflation has fallen today, savers are still being pummelled by high inflation and lower returns on savings.”
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