Inflation is a hot topic of conversation these days. The increase in price of food shopping, gas and electricity and fuel is, in part at least, because of inflation. Inflation is the rate at which the prices of goods and services have increased over the previous year. The higher the rate of inflation is, the less you’ll be able to purchase with the same amount of money compared to previously.
CPI and RPI – What are they and what is the difference?
Inflation is typically measured as an annual percentage rate of change in the Consumer Price Index (CPI). The Retail Price Index (RPI) is also used. Both the CPI and RPI look at products including groceries and fuel. They also look at services such as restaurants, utility bills and mobile phone bills. The difference is that the RPI also includes certain housing costs and the cost of mortgage repayments. The government now uses the CPI as its inflation index, which does not include house prices or mortgage repayments.
What’s happening with inflation now?
At the beginning of 2022, inflation reached the highest it had been for almost 30 years, at 9%. It rose even further that year, reaching a staggering 11.1% *, the highest in 40 years. Since then, inflation has thankfully fallen. As of July 2024, it sat at 2.2%. It’s important to remember, though, lower inflation doesn’t mean that prices are falling. It just means that they are rising less quickly than previously.
Does inflation directly affect mortgage rates?
Inflation is a critical economic indicator that can have a huge impact on various aspects of the financial world. This includes mortgage rates. The inflation rate doesn’t have a direct impact on mortgage rates, but the two do tend to move in tandem. A rise in the CPI means a shrink in purchasing power, as the cost of goods and services have gone up. These higher prices can influence the Bank of England’s base rate. This then has a knock-on effect on the cost of borrowing for products that lend money, such as mortgages.
So what does inflation actually mean for my mortgage?
The Bank of England* keep a close eye on inflation and use it to establish interest rates. This impacts the interest you may earn on savings or pay on a loan. If inflation is expected to rise, they may increase interest rates to discourage businesses from putting up prices any more than necessary. On the other hand, if inflation is set to drop below 2% they are likely to reduce interest rates. This will make it easier to borrow money, and enable people to spend more. This in turn will boost the economy. Because of this, inflation has a critical effect on your mortgage.
What can I do?
The main way to avoid being affected by inflation rises is to get a fixed rate mortgage. With a set interest rate for a fixed term comes certainty. You can be sure that your interest rate will not change, even if inflation is high. The gamble is, if interest rates go down, you won’t benefit from these savings. If you’re looking to take out a mortgage soon, or planning on remortgaging, talk to the experts. Contact us at Bell Mortgage Solutions and we can guide you through the options. We’ll advise you on how inflation may affect you, and advise on the best mortgage deal for your circumstances.
Please note: Your home may be repossessed if you do not keep up repayments on your mortgage.
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The information contained within was correct at the time of publication but is subject to change.
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