Unexpected inflation increase
The recent increase in consumer price inflation (CPI) to 4% is far from ideal for UK residents, especially as it seemed we were coming to the end of the long-running cost of living crisis. This week’s ONS data (covering December 2023) was driven by higher alcohol and tobacco prices; in broader terms, rising tensions in the Middle East may cause supply chain issues that impact prices and drive inflation. The interest rate cuts that many were expecting in 2024 are no longer quite so certain
Savings struggle
Persistent inflation erodes the purchasing power of money over time, diminishing the real value of savings held in most bank accounts. While savers can still get more than 5% on some one- or two- year fixed rates, longer-term rates have already dropped below this. Jatin Ondhia, CEO of Shojin, reasons: “A mix of savings products and lower-risk investments will, for many investors, be balanced alongside some higher-risk investments, providing the opportunity for greater growth in the medium- to long-term. However people choose to manage their finances in 2024, it will be fascinating to see the trends that take shape, given that the investment landscape has settled markedly when compared to a year ago.”
Mortgage rate respite
Over recent months, mortgage rates have eased from their peak in early 2023, aided by decreasing inflation. This has helped lower financing costs for homeowners and ensured there has not been a dramatic collapse in demand for UK properties. Prior to this week’s announcement, the Bank of England was optimistic that mortgage rates would keep falling as the inflation rate continues it’s downwards trajectory towards the Bank’s 2% target. Hopefully, December’s surprise rise is just a hiccup rather than a reversal and the UK property market will continue to show signs of life.
While Jatin remains optimistic that the base rates will be cut later this year, there are other factors at play for investors: “People will need to consider how they respond to these shifts, as well as broader considerations, such as ‘What happens if the UK economy enters a recession?’ and ‘What might the upcoming general election mean for my investments?’. To that end, given this lingering economic and political uncertainty, we should still expect diversification to remain front of mind for investors of all ilks.”
According to data released this week, average house prices decrease by 2.1% in the 12 months to November 2023. While this can’t be painted as a positive for property investors, the fall is modest considering some of the issues facing the market and broader economy. As we have outlined in this previous post, a difficult market can have advantages for lenders like Shojin.