Inflation rises to 10-month high of 3% in January – consumer credit industry reaction

Latest Office for National Statistics (ONS data has shown that inflation rose faster than expected in January, up from 2.5 per cent in December to 3 per cent. This is the highest annual rate of inflation since March last year.

The increase was driven primarily by increases in the cost of transport, food, and non-alcoholic beverages. Private school fees were also a factor, rising by almost 13 per cent, and the typical dip in airfares seen at the start of each year was muted, seeing the weakest fall in five years.

Commenting on the figures, Steve Vaid, Chief Executive of the Money Advice Trust, the charity that runs National Debtline, said “With inflation remaining stubbornly above target, and expected to rise further this year, the pain is far from over for struggling households. We are seeing clearly the effect that high prices have had, with demand for our debt advice services up significantly this January, compared to the same time last year.

“While it is positive that wages have been growing overall, there is little let-up in sight for many people, with another hike in energy and water bills around the corner. The Government must act to help households afford their bills, including by introducing an energy social tariff to bring costs down for people on the lowest incomes.”

John Phillips, CEO of Just Mortgages and Spicerhaart, said “Following a surprise drop last month, inflation has surprised once again, coming in higher than many markets and analysts had expected. Alongside upward pressures on food and transport, a key factor was education as private schools became subject to VAT in January and passed this on in higher fees.

“We have to be realistic and acknowledge that inflation is likely to remain a persistent challenge this year, particularly with geopolitical tensions escalating, higher energy prices later in the year and as we see the full effects of government policy, such as the national insurance hike. We also have the elephant in the room and the upcoming Spring Statement at the end of March.

“All along though, the central bank has maintained that it will push forward with multiple base rate cuts this year, as it balances sticky inflation with an economy showing minimal growth. Whether today’s bigger rise in inflation changes that trajectory is yet to be seen.

“From our perspective, January proved to be a positive month and this has continued into February with consistent levels of buyer registrations and demand for both valuations and adviser appointments. Customers have responded well to positive changes in the market with the base rate cut and both pre-emptive and subsequent cuts from lenders. While it is important to keep inflation under control, our hope is we do see further base rate cuts this year to maintain this positive momentum and allow the housing market to play its important role in driving economic growth.”

Mark Eaton, Chief Operating Officer from April Mortgages said “A resurgence in inflation is a reminder that the Bank of England is walking a tightrope when it comes to managing interest rates.

“There has been talk of further rate cuts this year, but those predictions feel premature with prices now rising more quickly. The truth is no one knows for sure what comes next. The Bank is forecasting that inflation will peak at 3.7% this year provided core inflation, which strips out volatile goods and services such as food and energy, remains stable.

“While the Bank is optimistic that it will fall back to 2% shortly after this, it may be wary of cutting rates too soon and will need to adapt quickly in response to global events. For borrowers, rising living costs will put further pressure on already stretched incomes and compound the affordability challenge impacting buyers across the country, particularly those trying to get a foot on the ladder.

“Access to larger loan amounts via modern 10 year fixed rate products won’t fix the problem but they could help borrowers overcome these hurdles.

“The mortgage market is in for a bumpy ride this year and borrowers should seek professional advice to help overcome affordability constraints and protect against ongoing rate volatility.”

Simon Webb, Managing Director of capital markets and finance at LiveMore said “Inflation has nearly doubled since September, when it was at 1.7%. Unfortunately, this rise to 3% – although quite a leap from 2.5% in December – isn’t surprising when you factor in market conditions and recent government policy.

“These price increases will further increase challenges for borrowers still straining to make their mortgage payments. People who have come to the end of fixed terms, for example, and have moved onto standard variable rates will feel this. For many people aged 50 to 90 plus, they may mistakenly believe that they’re mortgage prisoners, trapped in SVRs, when in fact they could well be eligible for a wide range of mortgages not usually available to people in these age groups.”

Sarah Coles, Head of Personal Finance at Hargreaves Lansdown said “Inflation is back to behaving like a caffeinated flea, bouncing higher in January, after December’s bigger-than-expected fall. The bounce was even bigger than the market had expected, so while it’s not going to set off a cacophony of alarm bells at the Bank of England, it’s not going to make them any more enthusiastic about rate cuts in the immediate future either.

“A jump in inflation never fills mortgage borrowers with optimism, but there are some signs that today’s news may not be the end of the world. The Bank of England had expected higher inflation, and has said it will go up again later this year without causing any major upsets. It hasn’t materially impacted expectations of rate cuts – so we’re still expecting a couple more cuts later this year – just nothing terribly soon.

Mortgage rates have eased off since last month’s inflation data came in lower than expected, with Moneyfacts figures showing the average 2-year fixed rate has fallen from 5.49% to 5.42%. Today’s news could call a halt to the cuts for a while, and might force some lenders to reprice slightly higher, but we’re not expecting a significant shift in rates.”