Figures released by the Government yesterday showed inflation had jumped to 4.4% in July, it’s highest level since January 1997, and more than twice the Government target of 2%. The monthly increase of 0.6%, the highest since records began, was largely fuelled by the increased cost of food and non-alcoholic drinks, where meat, cereals and vegetables all jumped. The cost of transport, furniture, housing and household services (including utilities) also rose steeply. Food prices are now up 13.7% on the year, another unwelcome record. The figures leave the Bank of England's Monetary Policy Committee with even less room to cut interest rates in the short term, as they try to manage both accelerating inflation and a slowing economy.
While many economists expect rates will have to be cut by 2009, there is real concern that in the shorter term inflation could top 5% as recent increases in utility prices are yet to take effect. This will come as another blow to homeowners that were hoping for a cut in Base Rate sooner rather than later, but there is some good news. The cost of borrowing for lenders continues to fall, and this is being passed on to consumers in lower mortgage rates. Lenders are keener to lend and there is some stiff competition, particularly among fixed rates for those with at least 25% equity in their property.