Inflation has reached the Bank of England’s target rate. What now?
Inflation has reached the Bank of England’s 2% target rate for the first time since 2021. Find out what an on-target inflation rate could mean for your money.
According to the Office for National Statistics (ONS), as of May 2024, inflation finally reached the Bank of England’s (BoE) 2% target rate and sustained it throughout June.
The target, set for the BoE by the government, exists in order to ensure that economic growth happens sustainably over the long term. And, as the BoE states, a consistent 2% inflation rate “helps everyone plan for the future”.
But since 2021, the UK’s cost of living crisis has pushed the rate of inflation higher than 2%, which may have caused you to worry about the real-terms value of your money.
Keep reading to learn how inflation has affected the UK’s finances in recent years, and what an on-target rate could mean for your money this year.
A brief history of UK inflation between 2019 and 2024
As of 2024, the rate of inflation is measured using a “basket” of around 750 goods and services. These range from everyday household items to luxuries, giving a broad picture of how much prices are rising.
So, a 2% inflation rate means that in the 12 months to June 2024, prices have gone up by 2% on average.
The below table shows the rate of inflation in June of every year between 2019 and 2024, to give you an idea of how prices have fluctuated in the past five years.
| Date | Rate of inflation |
| June 2019 | 2% |
| June 2020 | 0.6% |
| June 2021 | 2.5% |
| June 2022 | 9.4% |
| June 2023 | 7.9% |
| June 2024 | 2% |
Source: ONS
While only a snapshot of how the rate of inflation has changed in the last five years, it’s clear to see that there was a post-pandemic spike. In fact, inflation peaked at 11.1% in October 2022, its highest rate in 40 years.
Largely, this was to do with the sudden increase in consumer activity after the national lockdown was lifted.
In response, the BoE began to hike its base interest rate, upon which many lenders base their own rates. Between December 2021 and August 2023, the BoE raised the base rate 14 times, bringing it from 0.1% to 5.25%, where it has remained until the time of writing (July 2024).
These conditions contributed massively to the cost of living crisis.
Now that inflation has fallen again to the BoE’s target rate of 2%, you might assume that you don’t need to think about inflation any longer.
Yet despite reaching this all-important target, inflation is still a factor that could have a serious impact on your financial plan.
3 important ways that a 2% inflation rate could affect your wealth
- Interest rates may decrease, making borrowing more affordable
Beginning on a positive note, an on-target inflation rate might prompt the BoE to drop the base rate. In turn, banks and building societies may do the same, making borrowing (including mortgages and business loans) less expensive.
The BoE’s Monetary Policy Committee (MPC) meets approximately every six weeks to discuss the base rate. Meeting next on 1 August 2024, the committee could decide to lower the base rate now that the 5.25% rate has helped to lower inflation.
This being said, the BoE comments, “Inflation has fallen a lot already and that is very good news. The signs we’re seeing are encouraging. But we need to be sure inflation will stay low before we can cut interest rates.”
As such, it may be that the BoE bides its time before slashing the base rate – but if inflation remains on target, you could find that borrowing costs drop as a result.
- Prices have not fallen – they are just rising more steadily
When you see a headline about inflation “falling”, what this really means is that prices are rising more steadily than they were before.
Indeed, UK consumers are still experiencing the consequences of double-digit inflation, only now, prices are no longer rising at such a steep rate.
So, while it is positive news that inflation is now on target, it does not mean that the cost of goods and services are decreasing. As such, you and your family may need to prepare for higher-for-longer prices.
- Your cash savings may still be eroded by inflation
Perhaps most crucially, it is important to remember that inflation could outstrip the pace at which your money grows.
Even if your cash savings currently see an interest rate of around 4%, over time, the rate of inflation is bound to rise and fall. This might lead to the real-terms value of your cash declining compared to the cost of goods and services.
Using nearly 100 years of market data, Schroders studied the performance of cash and equities against the rate of inflation.
Over any 20-year period, equity values grew faster than inflation 100% of the time. On the other hand, cash had around a 60% chance of outpacing inflation, no matter how long you saved for.
The lesson here is that although inflation has fallen, balancing cash with a healthy investment portfolio could help your money grow in real-terms value.
Talk to a Kellands financial planner about how inflation affects your money
The rate of inflation may change, but the support of your Kellands financial planner is constant.
We’re here to ensure you feel confident and capable in your financial decisions, and can offer bespoke advice about shielding your wealth from the effects of inflation.
Email us at hale@kelland.co.uk, or call 0161 929 8838.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.