After the UK’s annual inflation rate fell in July, investment managers discuss the impact and potential interest rate rises.

The UK’s annual inflation rate declined to 6.8 per cent in July from 7.9 per cent in June, the lowest it has been since February 2022, new figures released by the Office for National Statistics show.

This was caused by falls in the price of gas and electricity as the reduction in the energy price cap came into effect. Food inflation has also eased again. Nevertheless, core inflation, which strips out fuel and food, rose 6.9 per cent in the 12 months to July 2023, unchanged from June. Consequently, the outlook could not be improving enough to prevent further interest rate hikes from the Bank of England.

Here are some reactions to the drop in inflation from investment managers. 

Nicholas Hyett, investment manager, Wealth Club
"Put falling inflation together with strong wage growth and, for the first time in a long time, salaries are going up faster than prices. The most recent set of GDP numbers saw economic growth beating expectations too, and you’d be forgiven for thinking the economic crunch is over. But unfortunately the fall in headline inflation has been driven by lower energy and food prices – very welcome, but outside the Bank of England’s control. Core inflation, which covers inflation generated within the UK economy remains unchanged month-on-month and at 6.9 per cent is still way above the Bank’s 2 per cent target. Further interest rate rises shouldn’t be ruled out.

“Past interest rate rises haven’t had their full effect on the economy yet either. The average interest rate people are paying on mortgages is 2.92 per cent. But the cost of the average two-year tracker sits at 6.18 per cent. That means most people haven’t yet felt the interest rate squeeze in full, and it’s only when historic fixed rates roll off that we’ll really know the full extent of the economic pain rate rises have inflicted. Economic data has given us a lot to like recently, but we’re not out of the woods yet.”

Jatin Ondhia, CEO, Shojin
“It’s good news, but there are strong rumours that next month’s data will show a rise in inflation once again. This story is far from over – Rishi Sunak and Jeremy Hunt’s target of bringing inflation under 5 per cent by the end of the year is looking increasingly out of reach, and that will have implications on consumers, investors, businesses and the financial markets. Even with today's fall, inflation remains high, and if indeed it does rise again next month, we have to expect the Bank of England to come hard with more interest rate hikes. As borrowing becomes more expensive, this will inevitably further impact house prices and property development. For investors, meanwhile, it is crucial that they assess how well positioned their portfolios are to deliver returns amid stickier-than-expected inflation. Diversification will likely remain a watchword for investors. Predicting quite where interest rates and inflation will go in the months to come is difficult, so many people will opt to diversify their investments so they are not tied too closely to any particular market forecasts.”

Chris Beauchamp, chief market analyst, IG Group
“The BoE can allow itself only a moderate period of rejoicing – headline CPI might be down, but the core figure shows that price growth remains sticky. Good news on goods deflation contrasts with the persistence of services inflation, yet another sign that higher prices are here to stay.”

Douglas Grant, group CEO, Manx Financial Group 
“Following UK wages growing at a record annual pace, there are concerns that the Bank of England may be encouraged to again raise interest rates. Today’s easing of CPI inflation is positive news and reaffirms that the UK economy may be stabilising. The business sector is not out of the woods yet and considering SMEs account for around half of all private sector turnover in the UK, we need more innovative measures to ensure their survival. As interest rates climb and inflationary pressures persist, SMEs must take this as a reminder to review their existing lending structures and ensure they remain ahead of the storm.”

Julian Jessop, economics fellow at the free market think tank the Institute of Economic Affairs
“The inflation data shows a welcome fall in the headline rate, but core inflation that excludes food and energy remains stuck at 6.9 per cent. The headline rate is also likely to tick up in August, reflecting higher fuel and alcohol prices, some unhelpful base effects, and the continued strength of the labour market. There are still plenty of reasons to expect inflation to tumble over the rest of the year, notably the sharp slowdown in money and credit growth. Rising unemployment and falling vacancies suggest that wage pressures will soon peak too. Unfortunately, the Bank of England continues to look backwards at the headline data over the last month or two, rather than pause to assess the impact of the substantial tightening in policy that is already in place. This makes another unnecessary interest rate increase more likely.”

Paresh Raja, CEO, Market Financial Solutions
"Another step in the right direction, with the CPI drop following on from the smaller-than-expected base rate hike at the start of the month. But it might be a case of two steps forward, one step back; all the talk this week has been that we are in for a shock rise in inflation when next month's data comes out on 20 September. Given the Bank of England's next interest rate decision follows the next day (21 September) that will likely prove a hugely important 48 hours.

"For now, we should allow some positivity to permeate back into the property and lending markets. After a challenging 18 months, any time inflation falls should be welcomed, and we could see such good news reflected in the products and rates available to property buyers. Still, lenders must double down on a proactive approach to supporting brokers and borrowers who will be feeling the effects of high inflation and consistent base rate hikes. In turn, lenders can help the market return to a more buoyant state."