Why inflation may rise again – and how to protect yourself
Price rises are slowing and the economic picture is getting brighter, but we may not be out of the woods just yet. Callum Mason reports
Inflation slowed to 3.4 per cent in February and economists expect it to fall further this spring – but many believe it will then rise again later in 2024. It is forecast that the rate of price increases will drop below 2 per cent, which is the Bank of England’s target, next month. However, based on current trajectories, some forecasters expect that it could rise to almost 3 per cent by the end of the year. Here’s what could happen to the inflation rate throughout this year – and what it means for you.
What experts predict for inflation later this year
In its Monetary Policy Report last month, the Bank of England said that it expected inflation to fall “temporarily” below 2 per cent in the second quarter of the year.
Its projection implied that inflation would be about 2.75 per cent at the end of 2024.
Other forecasters also expect a rebound, though some do not think it will be as dramatic.
The Centre for Economics and Business Research, a UK-based consultancy, expects inflation to hit 1.8 per cent in June, before a sharp upward increase to 2.6 per cent in the third quarter of the year. It then expects the rate to fall again to 2 per cent by the end of 2024.
Deutsche Bank Research has said it expects inflation to hit 1.7 per cent on average between April and June. It then expects the rate to rise to 1.9 per cent in the third quarter of the year and stay at this level until the end of 2024.
But some forecasters do not think that inflation will significantly rise later this year.
For example, Capital Economics thinks that inflation will hit 1.7 per cent in April and then fall – perhaps to 0.9 per cent – in June.
It thinks inflation will remain below the 2 per cent target throughout much of 2024 and 2025, reaching about 1.5 per cent at the end of next year.
Why some experts predict an inflation rebound
A key reason why economists expect a rise in inflation later this year is because of “base effects”.
Inflation measures the increase in the price of goods and services compared with a year ago. In April 2023, under the price cap, the average household paid £2,500 a year on their bills. So when the Ofgem price cap falls to £1,690 a year for a typical household next month, there will be severe downwards pressure on inflation.
However, in July 2023, the price cap fell to £2,074 a year. So when the new price cap is set this July, the difference will probably be less stark. Sanjay Raja, chief UK economist at Deutsche Bank Research, explains: “The big reason for the ‘rebound’ in headline inflation is due to base effects from the large fall in energy prices we saw last year.
“We also expect core goods prices to see some modest pick-up, due to a tightening of supply chains as a result of Red Sea tensions.”
The Bank of England said in its report: “In absolute terms, the direct energy contribution to inflation becomes somewhat less negative in [the third and fourth quarter] of 2024 compared to between April and June.”
Economists do expect the broader picture to be positive, which is why most expect falls after a spike later this year.
What inflation rising again means for interest rates
Interest rates tend to go down when inflation falls. Higher rates are used as a tool to subdue spending in the hope that this makes price increases slow down.
Rates are currently at a 16-year high of 5.25 per cent and experts expect that they will start to fall this summer.
Bank of England Governor Andrew Bailey has suggested that the country is on course to cut rates, telling the Financial Times that cuts were “in play”.
If there is strong evidence that a rebound in inflation will take the figure well above 2 per cent, the chance of an interest rate cut falls.
How to protect your money from a rebound
High inflation often prompts an increase in interest rates, which can lead to mortgage costs staying elevated or getting higher.
Experts expect rates to come down later this year and a rebound in inflation is factored into this. Still, you can protect yourself now if you have a mortgage rate expiring in the next six months. You can lock in a rate and then if a better offer becomes available, you can switch to that instead.
Inflation rising is also bad news for savers. It means if you have your money locked away, price increases are eating away at it.
However, you can still get savings rates of well above 5 per cent guaranteed for one or two years if you lock your cash away in a good account, allowing you to keep gaining.