‘Good as it gets.’ Five things that are set to get better as inflation falls

Stock markets soared and mortgage rates dipped after a bigger than expected drop from 8.7 percent in May to 7.9 percent. This is only the beginning with inflation set to fall below seven percent when July’s figure, as last year’s energy price spike drops out of the annual figures and global food prices retreat.

Here are five ways our lives may now get a little easier.

1. Our pensions and Isas will recover.

The inflation figure lit a rocket under the FTSE 100, which jumped 1.8 percent on Wednesday alone.

Housebuilder stocks like Persimmon and Barratt Developments led the charge, along with property portal Rightmove in a dramatic reversal of fortunes. 

“After weeks of declines, the FTSE 100 enjoyed its best day of the year so far,” said Chris Beauchamp, chief market analyst at online trading platform IG. 

This is good news for pension and stocks and shares Isa investors, boosting the value of their holdings with potentially more to come.

Victoria Scholar, head of investment at Interactive Investor, said UK shares have bounced back into favour as the UK economy shows resilience. “Global investors may now return to the FTSE 100 and FTSE 250, which have been overlooked for some time.”

Do not get carried away, though. “With inflation still sharply above target, the housing market under pressure and unemployment ticking up, we’re not out of the woods yet,” Scholar added.

2. Mortgage rates are falling.

Just a few days ago, the BoE was expected to hike interest rates as high as 6.50 percent in its battle to curb runaway inflation. Now they are forecasting a peak of 5.75 percent and it could be even lower.

Julius Baer economist David Alexander Meier expects the BoE to hike interest rates from today’s 5 percent to 5.25 percent at its next meeting on August 3. “A final hike in September to a peak of 5.5 percent now looks increasingly likely.”

Mortgage rates fell on Thursday, with the average two-year fixed-rate dipping slightly from 6.81 percent to 6.79 percent, according to Moneyfacts.

They will fall further if inflation drops in July, which will ease the pressure on 1.4million mortgage borrowers who are coming to an end of cheap fixed-rate deals.

This is a move in the right direction after months of rising rates, said Ben Thompson, deputy chief executive officer at broker Mortgage Advice Bureau. “Rates are still significantly higher than this time last year, though.”

3. House price crash threat reduced.

While the UK’s inflated housing market is likely to fall, the most dire predictions could be proven wrong.

S&P Global Ratings is forecasting that house prices will fall 12 percent by the end of 2024 but the doomsayers have been repeatedly wrong about the UK economy.

David Hannah, group chairman of Cornerstone Group International, said a double-digit house price drop seems unlikely as mortgage rates decline while wages grow strongly, up 7.3 percent in the three months to May. “There might even be a glimmer of hope for a house price rebound in the next six months.”

4. Savers may soon beat inflation.

Savers are a rare beneficiary of soaring interest rates with FirstSave’s two-year fixed-rate bond paying a best buy rate of 6.15 percent at time of writing. RCI Bank UK and Principality Building Society pay a fixed 5.8 percent a year over a longer five-year term.

Those who lock into a long-term fixed rate today may find they are getting an inflation-beating return within months, and for a long time afterwards, too.

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With the BoE likely to hike rates further, savers may soon getting the best of both worlds, said Adam Thrower, head of savings at Shawbrook, said. “To make the most of this opportunity, it’s crucial to act now rather than leave money in low-paying accounts.”

Sarah Coles, head of personal finance at Hargreaves Lansdown, said today’s market-leading fixed rate bonds “may be as good as it gets for savers” and she urged them to take advantage. “With inflation set to fall further it may be worth locking into a fixed-rate savings bond sooner rather than later.”

5. Prices in the shops may fall.

Falling inflation offers a spoonful of respite for shoppers too, but a trip to the supermarket will still hurt with food inflation running red hot at 17.3 percent, albeit down from 18.3 percent in May. “Grocery inflation should soon fall faster, though, as lower wholesale prices finally start feeding through to the shelves,” Coles said.

Yet extreme weather Russia’s move to block Ukrainian grain exports may trigger further price spikes. “The price of olive oil is still up 44.8 percent on the back of spectacular crop failure,” she added.

With petrol and diesel prices falling 22.3 percent and 24.3 percent respectively, there is good news for motorists, she added.

Last week felt like a turning point, said Nicholas Hyett, investment manager at Wealth Club, but he cautioned: “One swallow doesn’t make a summer.”