skyrocketing inflation at 2.2%: its implications for your finances explained

In a recent development, the UK's annual inflation rate, as measured by the Consumer Prices Index (CPI), has risen to 2.2% in July 2024. This marks the first increase this year and is higher than the pre-pandemic years when inflation was under 2%.

The increase is largely due to energy prices falling by less than they did a year before. Gas and electricity prices were the biggest contributors to the rise in CPI. However, fuel inflation slowed down in the latest data, and the Ofgem energy price cap dropped by 7% on 1 July 2024.

The inflation rate in Germany remained stable at 2.0 percent in July 2024, with a decline in energy prices offsetting rises in services such as transportation and postal services. Compared to recent years, the 2024 inflation rate is much lower than its peak of around 11.3 percent in late 2022, marking a significant decline.

In the UK, the annual increase in many rail fares is linked to the RPI measure of inflation and usually based on the July reading of that figure. This year, it clocks in at 3.6%. The decline in services inflation from 5.7% to 5.2% was much bigger than anticipated, while restaurant and hotel costs also decreased in the latest data.

Analysts expect inflation to stay above the Bank of England's 2% target for the rest of the year. Victoria Scholar, head of investment at Interactive Investor, predicts the Bank of England is likely to continue to proceed with further rate cuts potentially this year and next. Markets are now pricing in around a 45% chance of another 25 basis point cut next month.

Capital Economics thinks interest rates will fall further and faster than markets expect, reaching 4.5% this year and 3% next year. The average two-year fixed mortgage rate is 5.66%, while the average five-year fix is 5.3%.

Despite the rise in inflation, there is some good news for savers. There are currently 1,558 savings accounts that beat inflation, in stark contrast to a year ago when CPI was 6.8%. Olive oil and cocoa prices saw the biggest increases in supermarkets.

The next Bank of England interest rates meeting is on 19 September. It remains to be seen how the central bank will navigate the challenging economic environment and maintain a balance between controlling inflation and supporting economic growth.