Households set for mortgage cost hit as ONS says inflation rises again to 9.4% in June

The consumer prices index rate of inflation rose to a new 40-year high of 9.4% in the 12 months to June 2022, up from 9.1% in May, according to data from the Office for National Statistics today. That was slightly higher than the 9.3% consensus expectation polled by Reuters. On a monthly basis, CPI rose by 0.8% in June 2022, against a Reuters consensus of 0.7%.

Rising prices for motor fuels and food made the largest upward contributions to the change in the CPI 12-month inflation rate between May and June 2022. The largest, partially offsetting downward contributions to change in the rates were from second-hand cars and audio-visual equipment (principally recording media).

Adrian Lowery, financial analyst at investing and coaching platform Bestinvest, commented:

“This latest rise in inflation for June was a touch higher than expected but that will not materially alter the outlook for household finances or the Bank of England’s rate setters. The latest increase will though be used as leverage by unions and employees in wage negotiations with employers, particularly as earnings data yesterday showed average real pay falling by an annual 2.8% as salary rises were outstripped by inflation.

“This is the ninth rise in inflation in as many months, and the struggle for many families will be the rapidity of cost of living increases and the sudden adjustments to the household budgets that it is necessitating. We still have October’s energy price cap increase to come when inflation is expected to peak – but another of the more serious cost rises that some households need to prepare for will arise when they come to remortgage.

“This time in 2021, the average two year fix was at 2.55 per cent and the average five year at 2.78 per cent, 1.19 and 1.11 percentage points lower than today's rates of 3.74% and 3.89% respectively, according to Moneyfacts. Given the speed of rate rises this year, as the mortgage market catches up it is not unrealistic to see the average five-year fixed rate at 5% next year. A household with a £200,000 mortgage at 2.78% will currently be paying £926 a month: if they were to remortgage to a deal that was charged at 5.0% their monthly payments would rise by £244 to £1,170 – that is an increase of 26.3%.

“There are two things mortgage borrowers can do to mitigate against this. One is to switch to the current best deal as soon as they can – and this will usually be three to six months before their fixed-rate mortgage deal is due to expire. The second is to consider overpaying on their mortgage in order to bring it down a loan-to-value bracket – e.g., from 75% to 70% - before they remortgage, as this will get them a better rate.

“Interest rates could rise sharply next month. Bank Governor Andrew Bailey yesterday repeated that a half-point increase in the bank rate (which would be the first since the Bank gained operational independence in 1997) is an option for August's announcement from the monetary policy committee. That comes after five consecutive 25 basis point rate hikes as the MPC has targeted rising inflation in recent months.

“Bailey said that a 50 basis point increase will be among the choices on the table but that it is not ‘locked in’. He added, however, that the economy was already slowing. Financial markets are pricing in a 94% chance that the MPC will raise the benchmark rate to 1.75% from 1.25%. Expectations in money markets for rates in a year’s time have recent varied vary between 3.0% and 3.5%. Much will depend on the health of the real economy.”