Why Interest Rates Remain High Despite Falling Inflation: Explained in Citrus Bites

Welcome to Citrus Bites, our monthly video covering the latest economic news for investors. Inflation has finally hit the Bank of England’s 2% target, but interest rates remain stubbornly at 5.25%. In this episode of Citrus Bites, Richard Harris breaks down the key factors behind this decision.

Core Inflation & Wage Growth Keeping Rates High

While headline inflation has fallen, core inflation, which excludes volatile items like food and energy, remains elevated at 3.5%. Additionally, services inflation, driven by wage growth, is still running hot at 5.7%. Average regular earnings are also currently rising at 6%, although Richard anticipates a slowdown due to rising unemployment figures.

Car Insurance: A Case Study in Real-World Inflation

The episode also tackles the disconnect many people feel between reported inflation figures and their everyday experiences. Richard uses the example of car insurance premiums, which have skyrocketed by 50% year-on-year for him personally. This increase is driven by factors like parts shortages, rising import costs, increased theft rates, and higher long-term care costs for accident victims.

What’s Next for Interest Rates?

The Bank of England’s next meeting is on August 1st, with a slight increase in expectations for a potential rate cut. However, it’s important to remember that even a reduction might take time to translate into lower borrowing costs for consumers.

Have Your Economic Questions Answered!

Do you have a burning question about the economy? Send it in and Richard Harris might answer it in the next episode of Citrus Bites!

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