UK inflation has surged to 3% in January 2025, its highest level since March last year, according to the latest figures from the Office for National Statistics (ONS). This rise (unexpected or not) from December’s 2.5% reading is sending shockwaves through the economy, raising critical questions about the future of interest rates, mortgages, and household finances. In this blog, I will go through the key data released by the ONS and give my thoughts on how this might impact things moving into the third month of 2025.
Why Has UK Inflation Risen?
Every man and his dog will have their own theories or insights into why they think inflation has risen, but in my opinion the primary culprits behind this inflationary spike are transport costs, including soaring airfares and petrol prices. Food and non-alcoholic drink prices have also jumped, making everyday essentials even more expensive. And in a move that will likely be politically charged, the ONS flagged the rise in private school fees following Labour’s VAT imposition as another contributing factor. Inflation at 3% is not just a minor fluctuation; it represents a clear warning sign that cost pressures are not easing as hoped. Analysts had expected a rise to around 2.8%, so this 3% reading is a stark reminder that inflation remains stubbornly persistent, despite previous hopes of stability.
Mortgage Market Impact: Will Interest Rates Stay High?
Yes. I’m sorry if that was not the answer you had hoped for, but it is the honest one. If we are discussing mortgage interest rates, then inflation rising will undoubtedly send a jolt up the UK mortgage lender’s spines. Those lenders that have either reduced rates recently or were planning to will most likely hold rates as they are or increase them. However, for mortgage holders and potential buyers, the real question is whether the Bank of England will be forced to keep interest rates higher for longer.
The BOE has been under pressure to start cutting rates in 2025, but this inflation surprise could derail those expectations. If inflation remains above the Bank’s 2% target, we may see the current 5.25% base rate hold steady for longer, or even rise if inflation spirals further out of control. As I have already said, for homeowners, this means mortgage rates are unlikely to fall anytime soon. Those on variable or tracker mortgages will feel the sting the most, while prospective buyers may have to reassess affordability calculations.
Where Do We Go From Here?
The most pressing concern now is whether this 3% inflation rate is just a blip or a sign of a more prolonged problem. The monthly decline of 0.1% in CPI suggests some stability, but it pales in comparison to the 0.6% fall seen in January 2024. Meanwhile, CPIH—the measure that includes housing costs—rose to 3.9%, another indication that underlying inflationary pressures remain strong.
If inflation continues to defy expectations, the Bank of England may have no choice but to keep interest rates elevated, prolonging the pain for mortgage holders and businesses alike. That is why, if you have a mortgage coming up for renewal, you should speak to your mortgage advisor as soon as possible to assess your current situation. You mortgage advisor will be able to help you to secure the most competitive product and rate on the market in a time when rates are likely to fluctuate. Call or message our team of advisors at Oportfolio Mortgages today if you need help with your mortgage.
