Ignore the media clickbait on inflation

This week, inflation rose back above the Bank of England’s magical (and arguably nonsensical) 2% target.

And while this sent the clickbait-obsessed media into an immediate meltdown — the cost of living crisis is back, we’re all doomed! — the truth is that the data was actually good.

Both core and services inflation, which Threadneedle Street is more interested in than the headline number, cooled faster than expected.

Core inflation dropped to 3.3% from 3.5%, while services inflation took a nosedive to 5.2% from 5.7%.

This isn't just good news; it's like finding a four-bedroom flat for the price of a studio, as the Bank of England was expecting a fall to only 5.6%.

The stickier elements of inflation are finally unsticking, as Culture and Recreation saw its inflation rate drop, while even the notoriously stubborn Restaurants and Hotels sector showed signs of deflation.

If this trend continues, swap rates, the gizmos on which fixed rate mortgages are priced, may fall further, which would spell good news for mortgage demand, house prices and the broader property market.

Wage wars and GDP are a double-edged sword

But before everybody starts celebrating, there's a plot twist in the ongoing economic soap opera that is UK Plc.

While total pay growth this week cooled faster than an overpriced listing, regular pay is still hotter than a bidding war in a sellers’ market.

At 5.4%, regular pay growth still outpaced both the Bank of England's expectations (5.2%) and market consensus (4.6%). This could mean that the big drop seen in services inflation in July may not happen at the same pace again in August.

Add to this the UK's position as the G7's economic powerhouse, following this week’s Q2 GDP print, and we've got a recipe for sustained demand that could keep inflation simmering.

It's like trying to cool down a house with the heating on full blast – something's got to give.

The productivity drop in the GDP report is also another fly in the ointment. With the effect of this month’s rate cut yet to trickle through the economy, demand is likely to surge again.

This will potentially push inflation up, or at the very least, make it more difficult to fall, as demand continues to outstrip supply. This economic tug-of-war may mean mortgage rates hover around their current levels for the time being.  

The new maverick in town

Meanwhile, Professor Alan Taylor was named as the new member on the Monetary Policy Committee on Friday, following the departure of infamous hawk, Jonathan Haskel.

The Prof is stepping into a high-stakes game with the odds of a September rate cut currently at 45%; he will have to contend with a slew of conflicting data points.

However, Taylor's past research suggests he might lean towards the dovish camp in the short term. So that’s music to the ears of those hoping for more rate cuts.

And here's the kicker: new Chancellor Rachel Reeves has her fingerprints all over this appointment.

With a newly elected Labour government now in power, she will want to kick start her tenure with a strong economy. That means she will want to at least maintain the 0.6% GDP growth her successor left her with in Q2.

Therefore, she's likely rooting for rate cuts to keep the economic engine purring and have Labour branded as the party of growth.

Who said the Bank of England was independent? But then, if rates are cut, how many first-time buyers and people with mortgages will care?

If you are looking for a new home, contact Nick or Teresa at Quarters Residential Estate Agents, Wokingham on 0118 466 0292 (call or WhatsApp) or e-mail hello@quartersresidential.co.uk – we’re here to help!